Algorithmic Crypto Trading: What is it and Why Traders Should Care

Before the 1970s, financial institutions used to conduct their stock market transactions manually. If you wished to place a trade, you would have to monitor the stock market separately and later make a phone call to your broker at the trading institution instructing them on how to trade. The tables, however, turned in 1971, when NASDAQ became the first electronic stock market. Fast forward to the late 1990s, and stock trading adopted the use of algorithmic bots to facilitate faster, safer, and more profitable trades. Today, 90% of stock trades in the world are run by algorithms.

Cryptocurrency trading borrows its blueprint from the stock market trade, save for the fact that it is a decentralized trade. Cryptocurrency is the only tradable asset whose value fluctuates with double digits. This results in a highly volatile crypto market that is hard to track without some automation or upcoming crypto projects aggregator. This is the main reason for the adoption of algorithms in cryptocurrency trading.

What Is Algorithmic Trading?

An algorithm refers to a set of executable instructions aimed at completing tasks automatically. In reference, algorithmic trading adopts the use of computers programmed to follow executable instructions and trade on your behalf. It is a faster and more accurate means to trade. Algorithmic trading is also referred to as automatic trading. A computer software performs all the heavy work in the background, trades on your behalf, and present you with clean analytical charts through your trading terminal.

Cryptocurrency trading adopted the use of algorithms in its trading systems. Due to the need of personalization, algorithmic crypto trading evolved to the use of automated bots, API-based terminals, and hybrid systems. They are collectively known as the incarnations of algorithmic crypto trading.

The Three Incarnations of Algorithmic Crypto Trading

1. Bots

Trading bots are small, yet powerful applications which rely on pre-programmed parameters to function. Through the internet, they connect to a few cryptocurrency exchanges using an Application Program Interface which allows them to track the market conditions, analyze it, and automatically place specific trades once the set parameters are met.

There are three types of bots:

• Analytical bots

These specialize in collecting information from the market and providing accurate analysis for decision making. Analytical bots answer the “what, where, and when” to buy cryptocurrencies. It is an extremely useful application with the ability to track multiple platforms with ease and accuracy and provide analysis for trade.

• Assistant bots

These work almost exactly as analytical bots. They provide useful metrics when used for trading across multiple platforms. For instance, they can report when your portfolio is exposed to risk, and through this information, prompt you to manage the risk.

• Trading bots

These perform the actual trade; buying and selling cryptocurrency coins when the pre-set parameters are met. Some trading bots are powerful enough to perform the function of analytical and assistant bots for more efficient trading.

2. API-Based Terminals

Trading terminals offer more powerful automation in cryptocurrency trading. Bots perform just as good, but they are limited to just a few crypto exchanges. Terminals, on the other hand, use an Application Program Interface to connect to dozens of crypto exchanges simultaneously. They come with stronger analytical power; able to track all exchanges in real-time and provide all that information on one platform.

Additionally, terminals offer expanded functionality for algorithmic crypto trading. While exchanges such as Binance and BitMEX provide traders with just the basic orders, terminals take you a step ahead in automation by providing advanced functionality such as logical operators, ability to place hidden orders and to set trailing stops.

3. Hybrid Platforms

These combine the automation features of both bots and terminals. They provide one central platform from which traders can track multiple markets in real-time and automate simultaneous trades. They are rare yet powerful algorithmic crypto trading platforms that provide you with the best tools available for efficient crypto trading.

Why You Should Care About Algorithmic Crypto Trading

Powerful Analytics

The analysis is the backbone of successful trading. Algorithmic trading provides useful information which guides traders in their every day executions. The powerful analytics includes:

• Tracking multiple markets simultaneously.
• Tracking and managing your portfolio from one location.
• Trading charts which show your performance over time.
• Managing risk through accurate market assessment.

Speed

The volatile nature of the crypto markets makes it difficult for traders to time and place their desired order fast enough to realize the profits. Algorithmic crypto trading covers this by providing a faster way to track arbitrage and conduct trade. The algorithms are pre-programmed beforehand and are executed once the set parameters are met. It is especially useful for traders that have to analyze multiple markets and place each trade individually.

Accuracy

Algorithmic trading is fully reliant on the pre-set executable instructions. These instructions are fact-based, unlike human intuition. Humans are prone to errors. You can accidentally trade a wrong currency or risk losing your unrealized profits in a bid to gain more. Algorithmic bots, terminals, and hybrid systems eliminate this flaw by providing automatic trading. Additionally, the analytic power of algorithmic trading allows for more accurate forecasting and back-testing, which increase a trader’s chance of realizing profits.

Efficiency

Algorithmic crypto trading is fully automated. It will track and analyze the market on its own and place your desired trades. This saves traders hours of having to stare at the monitor tracking multiple markets. Additionally, it offers more efficient risk management capabilities which save you money.

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Created on Jul 29th 2022 22:56. Viewed 104 times.

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