How Does Crypto Algorithmic Trading Work?

15 min read

As cryptocurrencies are getting closer and closer to the long-awaited mainstream adoption, the market continues to develop in many different aspects. One of the aspects that have seen massive development over the past few years is the crypto trading market, specifically, automated trading.

While crypto algorithmic trading for beginners might be a bit confusing to understand, it is quite simple and is something that traders of all experience levels can benefit from. To put it simply, algorithmic trading is a process of the automated trading process.

When using this method of automation, you are using pre-set instructions on a computer program. While the steps are installed by you (or a professional trader), the automated trading software does everything other than that. It can include buying, selling, or holding cryptocurrencies.

These bots are programmed to start executing trades any time of the day as long as the predetermined conditions for defined variables for example price, time, or volume are met.

These bots are using special mathematical formulas and doctrines to make moves in the market, and the name – algorithmic crypto trading, comes from that. Algorithmic cryptocurrency trading bots are using a mix of mathematical models, very complex formulas, as well as human oversight to make final decisions according to the strategy that you are using.

Once the bot finds the desired trading conditions, it can make decisions to buy or sell a specific asset. But, there is much more that you should know about algorithmic trading in the cryptocurrency market. Below, we will discuss all the important things that you should know about algorithmic trading in the cryptocurrency market.

It’s The Same As Any Other Algorithmic Trading

More than ever before, cryptocurrencies are closer to widespread, mainstream exposure. Millions of people around the world have shown interest in the cryptocurrency trading market, and there are many reasons for this increasing popularity.

One of the main reasons for this is that the cryptocurrency market has become very easily accessible. Thanks to the modern crypto exchanges, all it takes to become part of the market is a good internet connection.

Further making crypto easier to trade are the trading robots. Thanks to algorithmic trading, crypto bots are very useful and high-quality. If you have experience using algorithmic trading in other markets, you will have a very easy time using it in the crypto market.

The main reason for this is that algorithmic trading for cryptocurrencies works almost the same as it works for other markets. You can simply go and subscribe to the services offered by companies that specialize in algorithmic trading, or just go for custom-made software that you code yourself, as long as you have some experience in coding.

As you might already know, algorithmic trading is not something that was created with cryptocurrencies. It has been used in numerous different markets for a very long time. There are numerous advantages that algorithmic trading has, which makes it very popular in the market.

Among other small advantages, one that is making algorithmic trading very rewarding for investors is the fact that it helps them save a lot of time while investing. As a trader who does not use any robots or EAs, it might take you hours to make very easy, small decisions.

In addition, it is almost impossible to scan the market 24/7 on your own to find the best trading conditions for your desired trading strategy. On the other hand, you can set your robot to do exactly that – watch the market for 24 hours and make decisions according to the settings that you have already provided for the trading robot. This is the same for every financial market.

It Has Strategies Like Any Other Trading Method

While understanding algorithmic trading in crypto takes some time, the best thing about it is that it works very much as it works in other markets. The best thing about algorithmic trading is that there are numerous strategies that it has, and as long as you are ready to look for them, you should not have a problem finding the robot or EA that fits your needs.

Algorithmic trading comes in many different forms and ways and understanding how each of them works can be a great help. To help you find the best available option for you, we have decided to review some of the best examples of the strategies used during algorithmic trading.

All of these are very useful and are followed by millions of people in the market. They are not specifically for crypto trading and can be used in other financial trading markets as well. Some of the best strategies that are available include Index Fund Rebalancing, Trend Following, Mean Revision, TWAP, and Arbitrage.

All of these methods are very popular in the market and are used by millions of traders. A very interesting thing about these strategies is that they can also be used in many other markets apart from crypto trading, which makes them especially popular.

However, this is not all. These are only a few examples that we are going to discuss today. So, follow our guide to algorithmic trading in crypto and find the best available strategies that fit your personal needs the most.

Index Fund Rebalancing

When you see that something is not working in your favor, there are numerous things that you can do. One of the most used tactics in this situation is fund rebalancing, which is a process of realigning the weightings of your portfolio.

This is a process of periodically buying and selling crypto assets and the main goal of this is to maintain an original or desired level of asset allocation or risk. This is a great way to judge your situation in the market, check your risks, and make sure that everything is in line.

One of the biggest advantages of it is that rebalancing safeguards the investors from being highly exposed to the undesirable risk in the markets.

Once you understand how crypto automation works, you should be able to use this process for rebalancing as well. The trading robots are capable of following specific trading steps that you provide very strictly, which means that robots can be a great option when working on rebalancing.

The best thing about fund rebalancing is that this strategy works in almost every market. It is one of the best ways to make sure that you are not exposed to too much risk and even if you are, you are allowed to control those risks.

Trend Following

Trend following is one of the best trading strategies and one of the most popular used in the cryptocurrency market. By identifying the general market trends and finding the possible trend reversal positions, investors can plan and optimize their positions which can be very helpful for the outcome.

As our crypto algorithmic trading guide indicates, this is actually where automated trading shines the most. The majority of the algorithmic trading robots are capable of analyzing the market data in a matter of minutes.

By doing so, the robots are capable of finding the best trends for trading in the market and see how possible it is for those trends to change in the near future. Using trend following strategy is available for any market around the world and is used by many people.

By understanding what the trends in the market are and how the trend could change, you can set your robot to start selling or buying once the trend reversal approaches. There are numerous ways to determine the current trends in the market.

While working on this guide to crypto Algo trading, we found that most of the trading around the world are using technical indicators that you can apply to your charts and see detailed technical analysis of the market in a matter of seconds. As a result, you can perceive the information provided on the chart a lot better and you can find the trends that you need for planning or positions.

Mean Reversion

Mean reversion, also many times called reversion to the mean, is a very popular theory that is used in numerous financial markets, including Forex, Crypto trading, stocks trading, and others to better plan trading. The theory says that asset price volatility and the historical returns will at some point in the future revert to the long-run mean or an average level of the entire dataset.

While it is a bit complicated, it is made a lot easier thanks to automated trading. While working on this guide to crypto automation explained, we found that there are numerous crypto traders that are using mean reversion.

The main idea of this strategy is that in the long term, the prices will return back to their previous average prices and normal pattern. However, sitting in front of your computer the whole day waiting for the market to get back to the mean, or average, does not make any sense.

Modern trading robots can continue analyzing the market data even when you are sleeping, and once your desired reversal is seen, the trading robot will start making moves for you.

TWAP

TWAP, which is short for Time-Weighted Average Price, is a very frequently used strategy/indicator in many markets. This is basically a measure of an asset’s average price over a predetermined period of time. It can be calculated for any asset in any time duration.

As our crypto trading automation explained guide shows, there are numerous ways crypto traders can use TWAP. Thanks to algorithmic trading, this process is made a lot easier. When using a trading robot, it does all the hard jobs for you.

It continues to oversee the financial market even when you are away from your screen and it is able to either alert you that what you were waiting for is happening, or actually make the moves in the market.

Arbitrage

One of the most popular strategies in the market is crypto arbitrage, which is used by a lot of people. This is a strategy that is used by investors to buy cryptocurrencies on one exchange and sell it on another very quickly for a higher price and make profits according to the price differences between these two exchanges.

As much as popular and rewarding, crypto arbitrage is probably one of the hardest strategies that you can use. This is especially true if you are doing everything on your own. It is almost impossible to be able to analyze the prices of certain cryptocurrencies on numerous different exchanges for finding the best buying and selling options.

This is where algorithmic cryptocurrency trading starts to shine the most. While you can’t analyze such huge information, robots can do that in a very efficient and fast manner. In fact, using robots is probably one of the main things that you should do to be successful at crypto arbitrage. Because the prices in the market change so fast, you are required to be super fast, for which, robots can be a great help.

It Protects You From Risks You Can Avoid

As we were able to find out today, algorithmic trading can be quite rewarding for traders. There are numerous things that individual investors can learn from trading automation, but it goes further than the profits that you make.

Algorithmic trading is capable of following the preferences that traders have providing very strictly. Thanks to trading automation, a lot of risks can go away. Because of this, the number of people using automated crypto trading apps is increasing every day.

Emotional Trading

One of the biggest advantages of using crypto automation and algorithmic trading is that it takes away the emotions from trading. This can be very important for traders. In many cases, some traders find it very hard to follow their plan closely.

This can be caused by numerous different factors, such as the fear of losing money, or the greed of earning more. Because trading robots do not have these feelings, they are able to take away the emotional side of trading, which can be very helpful for the final outcome.

The same thing can be said about other financial markets as well. There have been many instances when people lost their money because of their emotions. Robots are making this process a lot easier, which can be very helpful for many traders, especially for those who can’t yet control their emotions.

Analysis Gaps

Apart from this, one of the biggest advantages of using crypto robots is that there is less chance of leaving the information out from your analysis. Sometimes, things happen very fast in the cryptocurrency trading market, and mostly, investors do not have enough time to react to them.

In general, there always is some type of limit to the amount of data and information that humans can endure. On the other hand, there are trading robots that simply do not have such limits. They can use different types of algorithms to analyze the market and not leave any information out.

Crypto Algorithmic Trading Has a Bunch of Benefits

While working on this guide to crypto automated trading explained, we were able to find out that there are numerous advantages that crypto algorithmic trading has. For starters, algorithmic trading makes everything easier.

Thanks to this, traders have the opportunity to make well-informed decisions in the market and use everything that modern technology has to offer. But, two of the most important advantages of fusing crypto algorithmic trading are backtesting capabilities and 24/7 trading. Let’s discuss them below.

Backtesting Capabilities

Backtesting is something that can help traders of different backgrounds find out how useful something is in the market. In fact, you can backtest most of the available crypto trading robots and see how they could work in different types of market conditions.

While backtesting, you are using the historical data of the market to test out different types of strategies as well as robots in the different market conditions. As a result, you can get very detailed information on how useful the trading robot or strategy can be.

You can also find the market conditions that work best for the robot, and find out when it would be better to avoid using the robot.

24/7 Trading

The Crypto trading market is open 24/7, which means that traders have to always be alert about the ongoing things in the market. Because things can change so fast in crypto trading, sometimes, there simply is no time for traders to react to the changes.

On the other hand, there are crypto trading robots that are capable of keeping track of the market any time of the day and whenever the preferred market conditions arise, they will start trading for you.

This means that you are open to react to the changes in the market even when you are asleep, which can be a huge help for crypto traders.

So How Does Crypto Algorithmic Trading Really Work?

Algorithmic trading is a process of using computers programmed to follow a predefined set of rules for automatically opening or closing orders in order to generate profits for traders at a higher speed than traders would be able to do.

While working on this crypto trading bots explained guide, we found that most of the modern crypto robots are using API keys to directly connect to the crypto exchange that you are using. Once connected, the crypto robot is able to follow the settings that you have provided and make profits for you.

They work in a very simple manner as they follow different types of mathematical doctrines and algorithms to find the best buying or selling opportunities for retail traders. Understanding how crypto bots work is very important for traders, as they are becoming more popular in the market.

FAQ on The Basics of Crypto Algorithmic Trading

How do I start learning crypto algorithmic trading?

There are numerous courses where you can find crypto bots explained. In addition, the majority of the companies that are working on crypto trading robots offer their clients detailed information about the way the trading robot works and what are the things that traders should know about them. You can also use demo accounts to backtest the robots and learn exactly how you can use them.

What percentage of crypto trading is algorithmic?

Because the cryptocurrency market remains open at all times, many believe that crypto trading automation is very important. In fact, for many, it is almost impossible to trade cryptocurrencies without some type of automation of the process. Because of this, it can be said that about 60, or even 70 percent of crypto trading is algorithmic and connected to automation.

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