Capitalize on Algorithmic Trading
Buying and selling cryptocurrencies in this day & age has never been simpler. Users can quickly and seamlessly register within a crypto exchange, safely add funds to their wallets, and then engage in crypto trading. Despite the easygoingness of crypto trading, a new trading method has emerged by the name of algorithmic trading where traders can rely on powerful computers which analyze market trends and automatically execute trades on their behalf.
Algorithmic trading, also called systematic trading, automated trading and high-frequency trading (HFT), is a type of advanced algorithmic trading method which utilizes powerful computers to conduct a large number of trades in a matter of seconds, or even less.
How does algorithmic trading work?
Through a defined set of instructions based on a specific mathematical model which incorporates timing, price and/or quantity, this type of trading method carefully analyzes heaps of trading data in the form of detailed statistics of order transactions, chart trends and patterns across multitude of markets and exchanges, and does so in lightning speed.
First introduced in the late 1980s and early 1990s, the computer programs monitor live prices and techincal indicators, such as the moving average, and places buy and sell orders when the pre-defined conditions have been met. This diminishes the need to manually check live prices and execute trades, as the algorithmic trading system does this automatically by identifying the most optimal trading opportunity.
Algorithmic trading systems are consistently evolving to become more complex and more inclusive of different types of data, such as the behavior and habits of investors in good times and bad.
Advantages of algorithmic trading
- Best execution: Trades are typically executed at the best possible prices as the systems conduct simultaneous automated checks on several market conditions. This defeats the need for the trader to analyze market data and techincal indicators manually which in-turn saves time and energy.
- Rapid speed: Algo-trading places orders in an instant and accurate manner with ultra-low latency. Trade execution is timed correctly which avoids sharp price fluctuations and hence do not incur the opportunity costs arising from price volatility.
- Less room for error: Algorithmic trading reduces the risk of manual errors, mistakes or missclicks which can be caused by human traders. As long as the pre-set formula is mistake-free and effectively follows the intended instructions, the risk of human error is non-existent.
- Emotion-free: Since human traders are subject to emotional and psychological tendencies, while algorithmic trading is predominantly data-intensive and negates the influence of human emotions such as greed, fear and excitement. Acting on emotions can be beneficial for your trades but can also be detrimental to profitability; they’re not always justified!
Disadvantages of algorithmic trading
- High technology dependency: Algo-trading relies on technology, which includes high-speed and stable internet connections with low fast execution speeds and low latency. The computer systems involved in algorithmic trading could miss market opportunities, disrupt the trading process or even result in losses if techincal difficulties and failures occur.
- Neglects unforeseen events: Historical data, technical analysis and mathematical models can project future price movements – given market stability and the absence of black swan events. Unprecedent and high-impact market revelations are not taken into account in algorithmic trading, which may result in losses for those who adopt this system.
- Lack of human judgement: No matter how successful a certain high-frequency trading strategy is, the absence of human judgement can be a disadvantage for the efficacy of algo-trading. The crypto market is heavily sentiment and people-driven, which means that subjective and qualitative factors can also influence market movements, and most computerized trading mechanisms and formulas do not take into account the human factor.
Summary
Algorithmic trading saves the valuable time, energy and potentially the hard-earned funds of traders, as it analyzes data and transacts many orders in a rapid manner. While there is no room for human error, there is also no room for human emotions and judgement which can be quite useful at times.
If you’ve decided to give algorithmic trading a try, consider reviewing the success rate of a certain strategy and to review its results after a certain period of time. This will allow you to evaluate whether the trading method has achieved the goal desired.
Ultimately, to algo or not to algo will depend on your lifestyle, how much time and energy you are willing to spend to study market insights and execute trading orders, your crypto trading experience levels and knowledgebase. It is always advised to understand the risks involved in crypto trading – given their inherently-volatile nature – before going starting your crypto journey.
