How Algorithms Are Going To Change The Way We Trade Crypto
Technology is powerfully changing the way people trade in many markets. Cryptocurrency is opening up new frontiers in wealth creation, as well as introducing many fresh participants into the sector. This future group of traders may look at crypto trading as a full-time job or a hedge against inflation and societal instability – we have seen how the pandemic caused all kinds of stress on society. One nascent technology that has revamped conventional trading is trading using algorithms or “algo trading”, which gives traders a competitive edge to book profit, and looks likely to overtake classical trading techniques as the cryptocurrency market matures.
Traditional trading is where people watch charts all day and make decisions based on their knowledge, analysis, and also “gut feelings”. It can be an emotional roller-coaster but also has other disadvantages. There are technical issues, for example, an internet outage or your trade not being recorded at the exchange. There is also the simple fact that people need to eat, sleep, and have a life – you can’t do that if you are glued to a screen.
Algorithmic trading was introduced around 20 years ago for stocks, Forex and other markets. Initially, it tended to be used by large institutional investors, but the trading community soon took it up because of the cost reductions, time saving, and improved results. Now algorithmic trading is a significant part of most marketplaces and inevitably expanded over the crypto industry with a variety of solutions.
Algorithmic Trading in a Nutshell
Algo trading is the use of software programs to create and execute orders in marketplaces – usually exchanges. These are colloquially called “bots”. These bots trade with a speed and frequency that is not possible for a human being to achieve. They don’t need sleep or family time either. Algo trading strategies concern making buy and sell orders based on pre-set rules that are input into a computer application. The bot will execute trades automatically when the market conditions specified in its internal rules are hit. For example, it might buy at a low point, and sell when the market has moved up by 10%.
The algorithm is a mini-program that follows a systematic set of operations that are executed automatically. This is based on the inputs that the trader has programmed. These inputs are usually variables like price, volume, time, economic data, and indicator signals. Many factors can be used, but these tend to be the main ones.
After these criteria are satisfied, a buy or sell order is executed by the bot. For crypto exchanges, algo trading enhances liquidity, and ensures trading is more reliable by avoiding the impact of human emotions and errors on trading activities.
Overall, the main advantage of these bots is speed. Algo trading is also about automation and time-saving. It eliminates human mistakes and emotions, reduces slippage, and ensures resilience. As algo trading evolves, there will be new data mining possibilities. There are many common human errors that algo trading can prevent. Crypto markets have proved very volatile, and it is easy to panic when a trade goes against you. Look at what happened in May this year (2021) as the crypto market had a sudden fall, and positions hit “margin calls” and were liquidated by exchanges.
Superior Risk Management
One advantage of algorithmic crypto trading is that it can be back-tested, where users can test and tweak their strategy and observe potential positive or negative outcomes, without risk. You can also simulate algo trading to test strategy using demo systems without actually trading crypto to see if the proposed strategy is working. Extensive testing is needed before it is time to deploy algorithms.
Fortunately, risk management in algorithmic trading is flexible and parameters can be set to avoid major losses. While some risks associated with technology and capital will remain, the rewards generally far outweigh the risks.
The Benefits of Crypto Algo Trading
The crypto community – which is pushing forward innovative financial tools in the global economy – has embraced this technology and is utilizing algo trading to gain competitive advantage in the marketplace.
Like crypto itself, algorithmic trading is relatively new to the ordinary trading community – as opposed to professional traders with large institutions behind them – yet algo trading has the potential to revolutionize trading methods. Can you remember a time when you didn’t depend on your smartphone for all sorts of non-communication essentials, like maps, weather forecasts, and restaurant recommendations? It caught on quickly. So will algo trading.
This technology will make a big difference to the crypto trading community, and of course, will develop further in the times to come.
Embrace algo trading and you are embracing the future.