Have you ever wished that you could make money while sleeping?
Yeah, I know we have all been there—especially as a beginner. Just the thought of all the rigors of learning and trying to understand the continuously oscillating lines, crafting the specific moment to pitch your tent and get some cash can be very exhausting and time-consuming.
And you will admit, you are not always available and that moment of the ascension of market volatility to your profit can be lost.
What if there was a way to be online round-the-clock non-stop and make money with accuracy?
Well, there is and it is already popular in the crypto economy just that you didn’t know about it. Let me introduce you to algorithmic trading in crypto, which is similar to the use of artificial intelligence (AI) in crypto trading.
Key Takeaways
- A trading algorithm is a set of rules and instructions created to perform specific tasks such as reading data sets associated with the market, recognizing trends, and executing a trade.
- Crypto trading algorithms can operate uninterrupted without human intervention.
- Trades are executed at high speed while taking advantage of price oscillations and opportunities faster than any human.
- The future of algorithmic trading may be found in AI and machine learning technologies will enable algorithms to learn from market data and adapt quickly without supervision.
What is Algorithmic Trading
If you are to be honest with yourself you will admit that at some point in the trading process, you lost money because of a poor decision you made and it was because of a poor market analysis, emotion, and false intuition.
But unlike humans, this system gives you the ability to make accurate decisions at the precise moment unemotionally because it uses quantitative models giving you the best trading result and profit with opportunities and transactions you could have missed.
Algorithmic trading in cryptocurrencies also known as automatic trading, black-box trading, or Algo trading is a mode of making transactions using preprogrammed instructions (an algorithm) input into the computer program to be executed when those conditions are met.
It Is just like a personal trading assistant that is constantly working and making decisions within milliseconds.
This means that you can be trading while sleeping and still make a profit. The profit you will make might even be higher than the one you would have if you did it yourself. That is because the algorithm is constantly running and can capture opportunities that would ordinarily be missed if you did it yourself.
Trades may be configured to be executed based on asset price, technical indications, or the percentage of value in your portfolio, depending on your trading method (rebalancing).
How does Algorithm Trading Work?
A trading algorithm is a set of rules and instructions created to perform specific tasks such as reading data sets associated with the market, recognizing trends, and executing a trade.
Humans can not match the capability of algorithmic trading because of its high speed and frequency ensuring efficiency in the trading process.
To start using algorithmic trading in crypto, especially as a beginner, you need reliable software that can handle your strategies especially if they are complex. Such software is popular and it Includes:
TradingView
This software is Known for uncanny charting tools and community-driven scripts. It is a favorite tool among traders because it can create custom indicators and backtest strategies using Pine Script, TradingView’s proprietary scripting language.
MetaTrader
This tool is used in forex and stock trading a lot as it supports crypto trading and also offers advanced charting tools, automated trading through Expert Advisors (EAs), and robust backtesting capabilities.
Coinigy
This tool is a comprehensive platform designed especially for crypto trading, Coinigy can bond with multiple exchanges to give you real-time data while allowing complex trading strategies.
“A trading algorithm is a set of rules and instructions created to perform specific tasks such as reading data sets associated with the market, recognizing trends, and executing a trade.”
How Do You Set Up Your Trading Algorithm?
In order to utilize this technology to our benefit we need to create an algorithm and it may be stressful and confusing. But we will break it down so that you can easily do it.
We would analyze the steps in which this could be done seamlessly.
Step 1: Decide Your Strategy
Remember that the tool you are using works on a set of pre-programmed instructions made by you based on the strategy you want to use in your trading journey. But before you can do that you need to first of all decide on the trading strategy you want to use. If you are a beginner, a simple moving average crossover strategy is a good point to start.
Step 2: Choose a Platform
After you have developed your strategy, you need a tool to execute it. This means that you would need to select a trading platform that supports algorithmic trading such as TradingView among others.
Step 3: Code It
When you have decided on that, here comes the main part of the process—Writing the code. You will need to transform the strategy you have developed into Written code for your algorithm the specific language of the tool
In the case of a moving average crossover strategy, you will need to define the conditions for buying and selling based on moving averages.
Step 4: Backtest Your Algorithm
This next stage is also very crucial and it involves testing your algorithm against previous data to see how it functions and then adjusting your strategy based on the results. This helps you to identify potential issues and optimize the strategy before putting in real money.
Step 5: Deploy
Once you are satisfied with the backtest results, deploy your algorithm to start running.
Step 6: Monitor
Though we have stated that the function of algorithmic trading is to work continuously, it is still necessary to continuously monitor its performance and make adjustments to suit the changes according to your prerogative.
“Trades are executed at high speed while taking advantage of price oscillations and opportunities faster than any human.”
Top Crypto Trading Algorithm Strategies to Get Long-Term Benefits
Scalping
Scalping is also known as Scalp Trading and it is a strategy you can leverage to generate tiny profits from daily market volatility which could build up to a sizable amount.
This method can be used in forex or cryptocurrency trading because it reacts quickly to market changes as it reacts within minutes or even seconds. The main elements that can affect the result are consistency and quickness.
Momentum Trading Crypto
This strategy is used mostly by investors. With the code “buy low and sell high” they monitor the volatility and price changes of the coin and buy when they notice that the value of the coin is starting to rise and buy it only to sell at the peak of the trend before it reverses.
Momentum’s trading strategy is mostly for those with long-term trade in mind and has proven to be a very successful strategy.
Day Trading Strategy
This is one of the most profitable and straightforward ways to profit from cryptocurrency. This is when a position in the market is entered and exited using intraday trading—opening and closing trade within the same day.
“Crypto trading algorithms can operate uninterrupted without human intervention, executing trades with speed and accuracy.”
Range Trading
In this type of trading strategy, the price movement within a particular range is closely monitored. To be able to participate in this form of trading you should be very familiar with concepts such as resistance and support lines to be successful in this strategy.
Reverse Trading
In this strategy, you are monitoring the direction of the trend using price action and technical indicators to spot patterns from the trend lines.
High-Frequency Trading (HFT)
In this strategy, trading bots are created with algorithms that facilitate quick entry and exit of the asset. This type of algorithm approach is known as HFT and it is used mostly by Quant traders and experienced traders.
Popular Algorithms Used in Crypto Trading
There are various popular strategies that you could adopt in the trading business.
Arbitrage
This kind of algorithm is designed to take advantage of price differences of the same asset but on different exchanges. That is, if Ethereum is cheaper on one exchange, the trader buys it on that exchange and sells it on another that is expensive.
Market Making
This involves placing buy and sell orders for a specific asset to profit from the bid.
“The algorithmic trading, while effective, is not perfect. It can be interrupted by technical glitches, connectivity issues, or exchange outages.”
Trend Following
In this Algorithm, the knowledge that assets will continue to move in their current direction is the inspiration for this strategy. This makes traders ardently follow the market trend and know when to buy and sell assets usually on the downtrend and uptrend respectively.
Pros and Cons of Algorithm Trading
There are various advantages and also disadvantages of innovation that we must look into such as:
Pros
- Crypto trading algorithms can operate uninterrupted without human intervention
- Trades are executed at high speed while taking advantage of price oscillations and opportunities faster than any human
- Algorithms do not make decisions based on emotions like doubt or fear therefore the programming ensures that the task is executed accordingly as predetermined.
- Algorithms can analyze more than one technical indicator at the same time.
Cons
While the advantages Sound juicy, the process of designing an effective algorithm requires advanced programming skills and a deep understanding of market dynamics
- Though in other to test the algorithms is necessary to ensure the proper running of the program as specified, relying on it can lead to poor performance in the live market
- The algorithmic trading, while effective, is not perfect. It can be interrupted by technical glitches, connectivity issues, or exchange outages.
Conclusion
Algorithmic trading is nonetheless an effective approach for crypto traders, offering 24/7 automation that captures opportunities faster than any human could.
Using algorithms improves decision-making as insights on data are analyzed first before trades are executed. There’s precision, no emotions attached, and although some challenges are evident, the success rate is higher which is certainly all that matters to traders.
Frequently Asked Questions (FAQ)
1. What are some popular algorithms in crypto trading?
Some popularly used algorithms include Trend Following, Arbitrage, and Market Making. Each of these algorithms employs different strategies based on market data to execute trades.
2. How does algorithmic trading work in the crypto market?
Algorithmic trading uses pre-programmed instructions to carry out trades based on specific criteria, such as price movements, trading volume, or time. This allows for faster and more efficient trading than manual methods.
3. What are the advantages of using algorithms in crypto trading?
The advantages of using algorithms in crypto trading include increased trading speed, the ability to analyze large data, improved decision-making through automated strategies, and no emotion in trading decisions.
