The Basics of Algorithmic Trading – All You Need To Know

13 min read

Algorithmic trading is the use of computer programs to determine the possible direction the market could take. This type of trading automation is very frequently used in numerous financial trading markets, including Forex, stocks, cryptocurrencies, and many others.

No matter which assets you are trading, knowing the basics of Algo trading can be very helpful in your trading endeavors. There are numerous automated trading applications and programs that are used by traders to make investing easier.

It can be very helpful for traders who simply do not have enough time to sit in front of their screen and spend hours analyzing the market. Algorithmic trading is a very fast, efficient, and helpful way to analyze the market.

The trading robots in the market are capable of analyzing large chunks of data in a very short time, which can help you save a lot of time while trading. In addition to this, the majority of the robots are also able to not only analyze the market but also open and close positions for traders.

While there are many things that traders should know about automated trading, it is actually very simple to use. There are many different types of algorithmic trading programs, and every single market requires different types of them.

Autotrading is especially popular in markets like cryptocurrency trading, where everything can change very fast. Because the changes happen so frequently and so fast, it can be a bit hard for traders to analyze everything about the changes.

Below, we will talk about the basics of automated trading, so follow our very detailed guide to find out what you should know to successfully use automated trading programs in different trading markets.

Leasing/Renting or Making Your Own Software?

There are several options that you have when it comes to using software for trading automation. While there are numerous trading robots available in the market that you can download and use, there are also other opportunities, such as creating one of your own.

Many people in the market prefer to lease or rent a trading robot that was created by professionals. In most cases, these robots come with pre-determined settings that can be used by traders in numerous different market conditions.

By subscribing to the services of one of the companies that offer trading robots, you are able to download their application or connect it directly with your exchange with a special code and let it do everything for you.

However, most of these robots are created for specific markets and can’t be used for trading other assets. Also, there are some traders who have very specific needs that can’t be addressed by these robots.

If this is the case, a trader might decide to create a trading robot of his/her own. As our trading robot guide shows, there are many people in the market who do so. These custom-made robots in most cases better fit the individual needs of traders.

However, it should be noted that it is not easy to create a trading robot of your own. Those who do so have specific experience in coding and software development. Also, when you are creating your own custom robot, do not forget to check how useful it is really well.

One thing to do is to check it using backtesting and see how useful it can be in different market conditions. Only after you have tested the robot really well you can start using it for actual trading.

Choosing Your Trading Strategy

While working on this automated trading guide, we found that another very important thing that traders should keep in mind while using trading robots is the trading strategy they are using. There are numerous strategies that traders can use for trading automation, but there are some that simply work a lot better than the others for trading automation.

There are numerous trading strategies that you can use for trading automation, such as Index Fund Rebalancing, Trend Following, Mean Reversion, TWAP, Arbitrage, and many others.

The strategy that you use for automated trading is very important for trading. No matter which one you use, make sure to always backtest it and see how useful it is in different types of market conditions.

While also trading for beginners can be a bit hard, there are several ways to make it easier. First of all, you should focus a lot on the type of robot that you want to use. Then, you should focus on choosing the best asset for the robot, and after that, you should pick a trading strategy that fits all of your choices the best.

Let’s talk about the most popular trading strategies used around the world for trading automation.

Index Fund Rebalancing

Rebalancing is one of the most used trading strategies used by millions of people around the world. It is a way of avoiding too many risks in the market and better manage the risks that you are already open to. Rebalancing is a very basic process that envisages the realignment of assets in a portfolio, with the main aim being keeping the regional risks or making the risks even lower.

So, for example, let’s say that you had invested 5 percent in cryptocurrencies and 15 in stocks and you believe that crypto investment has grown a lot and there is less risk involved in that. You can change the amount of money you have invested in crypto and it can help you make higher profits. Since you believe that crypto has become less risky, the final risk tolerance won’t change.

While working on this guide to automated trading explained, we were able to find out that there are many people who are using rebalancing to keep up with the developments in the world. By using trading robots, you can better stay in touch with the market developments and make decisions even faster.

Trend Following

Trend following is one of the most popular trading strategies around the world. When you are using this strategy, you are mostly spending your time analyzing the charts and using different types of technical indicators to find the general trends in the market.

You are also looking for the places in the chart where the trend is most likely to reverse, which can create a lot of opportunities for profits. However, doing all of this on your own can take a few hours and can be very tiring.

Knowing the Algo trading basics can be very helpful for traders who are using this strategy. Most of the trading robots are great when it comes to analyzing the technical part of the market. In fact, they seem to be the best in that regard.

As a result, using robots for trend following is considered to be a very popular thing to do. The trading robots are able to analyze the charts in a matter of minutes. While it could take you hours to find the main trends in the market, robots can do so very efficiently and very fast. This is why it can be so helpful to use robots when trading.

Mean Reversion

There are numerous strategies and theories in the financial markets, but one that is very popular and interesting is the mean reversion. According to this theory, the asset price volatility and returns will eventually revert to the long-run average (or mean) level of the entire history of the asset. There are numerous ways that this mean level can appear, including economic growth, volatility of a certain stock, its P/E ratio, or the average return of the whole industry.

While working on this guide to trading with robots, we found that there are many people who believe in this theory and they are using numerous types of robots to find the best opportunities in the market to make profits.

The theory has managed to lead to numerous trading strategies including for makers such as stock trading or even options trading. There are many other strategies that trading robots can be used for.


TWAP, which is short for Time-Weighted Average Price, is the average price of a certain asset which is used to measure the average price over a predetermined period of time. It is used very frequently by traders to optimize the average price while executing trades for a certain period of time. In most cases, it is used to execute large orders where the small differences in the price will not have a huge impact on the final result.

Using TWAP on your own, without any additional software or helping tool can be a huge challenge. When using this method, you are very likely to have to analyze a huge amount of data that can be almost impossible for a human being to do.

Because of this, it is very common for those using TWAP to also use automated trading software to make things a bit easier. So, if you are planning on using TWAP for your trading, it would be nice to learn algorithmic trading and its basics first.


Arbitrage is one of the most popular trading strategies which is used in many different markets. The main idea about arbitrage is buying something from one seller at a lower price and selling it to others at a higher price. As a result, those using this strategy are making profits according to the difference between buying and selling prices.

To make it easier to understand, let’s talk about a specific example. Let’s say that you have bought Bitcoin from one crypto exchange where the price was low. Then, you find another exchange, where the price of Bitcoin is a bit higher. You sell your Bitcoin to that exchange and you make the difference between exchange’s prices as your profit.

However, this can be a very tiring and hard process. When using arbitrage, there is a lot of things that you should keep in mind. In addition, you will be required to constantly scan the prices of different exchanges/brokers.

This is why you should know automated trading basics. By using robots, you will be able to analyze the needed data a lot easier and the outcome will also be much better.

What Algorithmic Trading Software is There?

There are a lot of algorithmic trading programs available around the world. All of the available markets have their own trading robots that can be used by traders of any experience.

For example, some of the most popular trading platforms in the market, MetaTrader 4 and MetaTrader 5 offer traders access to Expert Advisors. EAs are very popular in the market and they can be used by traders to analyze huge chunks of data. In most cases, the EAs that are pre-installed on MT4 and MT5 are free to use.

But, there are other paid versions available in the market as well, including Zeus EA which you can download and add to your trading platform in just a few clicks. Most of the trading EAs available on MT4 and MT5 are created for Forex trading, but some of them can be used for other markets as well.

One of the best-known trading robots in the market is one created by Bitsgap, which is a perfect fit for crypto trading. As our trading automation guide indicates, Bitsgap trading bots can be used to connect to the exchanges directly by using an API key, which is a secure way of connecting exchanges with robots.

All of these programs are very well known in the market and are trusted by a lot of people. However, this is not all, there are many others available in the market. If you don’t seem to find the one that fits your needs best, remember that you can also create one of your own.

Skills You Need For Effective Algorithmic Trading

When using algorithmic trading robots, it is very important that you make sure that you have some of the main skills that are required for using trading robots. First of all, you need to have some type of understanding of the assets you are trading. This way, you will be able to judge how the trading robot works and how effective it truly is.

Then, you should also have some tech skills. This is especially important if you are creating a trading robot of your own. But, even if you are not and you are using a robot created by professionals, you still need some skills to add the robot to your trading platform.

Our guide to trading automation explained also indicates that in addition to these skills, it is also very important for traders to have enough analytical skills. Although the robot is doing a lot of things for you, you are still required to be able to control it and if there is some type of emergency, you are able to act very fast.

All in all, as much as trading automation makes everything easier, it does not mean that you can simply sit back and do nothing. Trading robots simply make your job easier, they do not take away everything from you.

FAQ on The Basics of Algorithmic Trading

How do I start learning algorithmic trading?

If you follow our algorithmic trading guide, you will see that learning more about algorithmic trading is not hard. First of all, you should understand what trading automation is and why it is needed at all. Then, you should learn what different types of trading robots are and why you need different ones in different financial markets. Then, you need to understand how to use the trading robots for the best outcome and learn how to stop trading when the odds are against you.

What percentage of trading is algorithmic?

A huge part of trading is algorithmic. But, the answer to this question depends on the asset that you are trading. If you are trading stocks, there might be a smaller part of it automotive. But, for markets like a crypto exchange, where things change very fast, it can be said a majority of the trading is algorithmic, maybe 60, or even 70 percent of the trading.

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