Basics of crypto algorithmic trading: concepts and examples

December, 07th 2023

Crypto algorithmic trading is an attempt to remove emotions out of trading and allow you to execute the most efficient trades. It places orders almost instantly and may even lower trading fees. The technique is especially critical for traders who handle a sizable crypto portfolio.

Let's explain the basics of algo trading in crypto and how you can capitalize on this strategy to make money from cryptocurrency.

What is crypto algorithmic trading?

Crypto algorithmic trading (AKA algo crypto trading, high-frequency, or black-box trading) applies a computer program and crypto markets to execute crypto trades at precise moments. This allows you to generate profits at a speed and frequency that is impossible with manual trading.

In algorithmic trading, users instruct a crypto trading bot how to trade and the tactics to focus on.

Its predetermined commands are based on parameters like timing, price and other mathematical models . Besides the high profits traders enjoy from crypto algorithm trading, this approach boosts liquidity in the market by stripping emotions out of trades.

Here are the primary elements of crypto algorithmic trading:

Evaluation of market information:The bots crawl into the market and glean critical data that aid in making informed decisions. The data can be in various forms, including prices, quantity, and timing. The bots evaluate the available information and use it to recognize market trends.
Launch of strategy:Crypto trading algos use market information to enact a trading plan. Whether the strategy is simple or complex, the bots can help you execute it.
Execution:When the bots recognize an opportunity in the market, they'll place a relevant order. The swift placement of a buying or selling order helps you to take advantage of the fleeting opportunity in the market.
Loss mitigation: Crypto trading algorithms have inbuilt features that manage risks. For example, they contain stop-loss orders that straightaway trade assets when their prices drop by a specific margin.

How crypto algorithmic trading works

Crypto algorithmic trading relies on pre-set rules to determine when to buy or sell assets. The instructions specify the time to trade the asset, the amount to buy or sell, and the price to trade the crypto. The rules are usually based on previous information and other mathematical models.

For example, a bot can be programmed to purchase a specific amount of an asset when its price decreases to a particular level. When the bot recognizes a trading chance, it places an order on a trading website. The trading platform will complete the order per the bot's rules. The process occurs promptly, helping traders leverage any opportunity in the market.

For example, assume an algorithmic trader uses the below approach:

Buy BTC when its price hits above the 100-day moving average
Sell the asset when its price falls below the 30-day moving average

Suppose the price of BTC is $39,000, the 30-day moving average is $37,000, and the 100-day moving average is $35,000.

In the above scenario, if the price of BTC increases above $39,000 and crosses its 100-day moving average, the bot will execute a purchase order. If the rate keeps rising, the bot will maintain the position until the price decreases to below $35,000 and the 30-day moving average. At this stage, the bot would straightaway deliver a sell order and exit the position with a profit.

The crypto trading algorithm uses predetermined rules to monitor BTC prices and moving averages to determine when to execute a buy or sell order. Traders who leverage the bot avoid the stress of evaluating live prices or studying graphs.

Advantages and disadvantages of crypto algorithmic trading

Now that you understand crypto algorithmic trading let's focus on its draws and downsides.

Advantages

Here are the primary perks of using a crypto trading bot:

Prompt and efficient execution of orders: Bots quickly execute orders without the impact of human feelings. They promptly identify market opportunities to help you optimize profits.
Minimal Latency: Prompt placement of orders and precise execution help to avoid unnecessary dormancy that might lead to significant price shifts.
Backtesting: Users can backtest crypto trading algos using past information to assess the effectiveness of a bot trading strategy. The findings can help in tweaking the strategy to be more effective.

Disadvantages

Despite its draws, crypto algorithmic trading has multiple drawbacks, including:

Reliance on historical data:Trading bots utilize historical data and mathematical simulations to forecast market trends. However, unexpected interruptions can occur, leading to losses.
Issues of technology: Trading algorithms require specific technologies to function, including the internet and computer programs. If these technologies encounter problems, there will be significant trading disruptions, which might lead to losses.
Laws: Bot trading must adhere to multiple regulatory standards. However, some regulations are challenging to observe.

Technical requirements of algorithmic trading for crypto

Launching a crypto trading bot has various technical requirements you must meet. Here are the key ones:

Computer programming skills: If you plan to implement an algo trading strategy, you must equip yourself with the necessary programming skills. However, you can use a premade crypto trading robot to place orders.
Robust network connectivity: This helps bots reach out to trading websites to place orders.
Availability of data feeds: Algos evaluates data feeds to recognize market opportunities for order placement.
The necessary infrastructure for backtesting: Backtesting helps you examine the bot and fix any issues before going live.

Frequently asked questions about crypto algo trading.

Is crypto algorithmic trading legal?

Crypto algorithmic trading is permissible as it lacks specific laws to minimize its application. Although the trading bot can sway the market to the detriment of manual traders, it’s still legal in the crypto world.

How do I learn crypto algorithmic trading?

You need a background in quantitative modeling to have an upper hand on bot trading. Also, traders who want to apply this technique need knowledge of crypto markets. Knowledge of coding or computer programming is also helpful.

Can you make money with crypto algorithmic trading?

Yes. Algorithmic trading is a popular technique for making money among crypto traders. Traders using the method can promptly recognize profitable trades and execute them.

Try our Crypto Algorithmic Trading Bot

Our Scientific Trading Bot offers several advantages over many crypto algorithmic trading bots in the market. It is an extremely robust crypto trading bot with advanced features and ability to ability to fully automate your portfolio. It lets you quickly identify opportunities in the market and place orders on your favorite trading platforms.