In algorithmic trading, programs execute a set of instructions to place and execute orders. Based on price, time and volume, algorithms make the trading more systematic and are popular with crypto.
To deal with algo trading, let’s see what it is.
Algo trading review
In the world of traditional trading, pension funds, mutual funds, insurance companies and other large institutions are fighting the infinite war over time, speed, volume and price. Their battlefield is NYSE, NASDAQ and other major markets, their soldiers are piles of black boxes performing high-frequency trading (HFT), which is a more developed version of algo trading.
So why do traditional markets go for HFT instead of algorithmic trading?
The traditional market’s $44 trillion capitalization looks much bigger compared to crypto’s $300 billion market cap. Thousands of micro transactions occur on top of the world’s largest stock exchanges every single second during trading hours.
No wonder that with this level of competitiveness, large institutions investing millions in stocks have to use powerful machines which help them gain the upper hand in the market.
In traditional stock markets, every microsecond means a lot, because these markets are not very much fluctuating. And you can only earn money within short time-frames and on multiple micro deals.
Powerful machines perform the lowest possible data-latency trades (with no time delays) and place a large number of orders at rapid speeds across many different markets.
In the infant cryptomarkets, however, the volumes are smaller than in the traditional market, so high frequency trading is not much in demand.
But how can we get ahead of other players in the cryptocurrency niche? The general concept of algorithmic trading that is somewhat bigger and older than HFT can be very well implemented there.
In a nutshell, while using a specific software, also known as algo trading bots, crypto traders can use variables of time, price and volume to employ data processing and speed over other traders.
Interestingly, this approach very much contrasts to the traditional markets packed with black boxes fighting with each other without humans involved.
Algorithmic trading strategies
Algorithmic trading strategies in crypto are normally the strategies that have originated from the traditional markets. Well, how else could it be?
For each of the strategies mentioned down below you might want to use separate algorithmic trading software.
With cryptocurrencies, these are normally bots that help you get ahead of other human traders.
With traditional markets, large trading firms, such as hedge funds and investment banks, often build their own software and have trading centers with dedicated data and a support desk.
Let’s see how these algorithms work both in crypto and in the traditional segment.
In traditional trading as well as in the crypto niche, this kind of strategy is the easiest to automate because it doesn’t involve making any predictions.
The trades are normally initiated based on technical indicators that can trigger the execution of the orders once certain levels get reached.
For example, bots can use 50- and 200-day moving averages, trend lines, chart patterns or momentum indicators.
What you should keep in mind while considering this automation strategy is that it is based on technical analysis, and while using a crypto bot you might want to choose one that has desired indicators.
There are different kinds of arbitrage out there: statistical arbitrage, triangular arbitrage, cross-market arbitrage, cross-asset arbitrage.
All of them can be used in both markets we’re covering. However, arbitrage works pretty well with stocks vs futures because the difference in price often exists in the context of these assets.
Arbitrage bots in crypto these days are less successful than before 2017’s hype as the price difference between exchanges is not as wide as it used to be. And yet, the price difference in inefficient crypto markets can be used by algorithms in order to buy a coin at a lower value and simultaneously sell at the higher one.
In order to make quick manifold profits, it’s important to close deals in a quick manner, since price differences may exist for no longer than a few seconds. And this is where an arbitrage crypto bot can come in handy.
If you’re familiar with the concept of spread, you probably know how it is comprised of the bid and ask prices.
Algo trading based on this strategy will help you profit from the difference between the bid and ask prices.
In traditional trading, market making strategies normally get implemented by large institutions, so it is hardly possible for you to automate this strategy on top of those markets.
Yet, in crypto it is still possible. Not only is the bot’s objective to sell to investors at a higher price than they have bought the asset, but also do it as frequently as possible.
The market maker bot scans for markets with wide spreads day in day out and places orders with a different price than the existing one – thus market making.
To sum up
Algorithmic trading also known as algo trading is normally used by crypto traders to get a competitive advantage over other traders in time, price and volume.
In traditional markets, algo trading has turned into a more speed-oriented high frequency trading.
The most famous algo trading strategies in crypto include trend following, arbitrage and market making. But of course there are many more.
What you should keep in mind while choosing a crypto bot for yourself, is the level of your experience with different exchanges, technical analysis and trading in general.