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    Algorithmic Cryptocurrency Trading

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    Ilya Krupin
    CEO, HiCoTrading.com

    The digital money industry had quickly adopted the latest technological achievements and innovative solutions used in stock trading. Do you still try to perform cryptocurrency trading manually? Moreover, you often wonder when the right time to buy or sell is? There is no need for that in the modern world.

    With the algorithmic cryptocurrency trading, the market survival became easier — no wonder that millions of people tried to predict the cryptocurrency market trends traded manually on the exchanges and they all lost money eventually.

    After reading this article, you will learn a lot about the potential of algo trading of cryptocurrencies: what it’s all about, how effective it may be and should you engage into it at all being an ordinary trader – “average Joe” or “hamster” type.

    Let’s start with the definition. Algorithmic trading (sometimes also called automated trading or algo trading) is a process by which computing power is used to execute trades according to a predefined set of instructions — or what is known as an algorithm.

    What do you know about the tools for trading?

    Well, the ZeroHedge study says that 84% of transactions on the world exchanges are carried out using the high-frequency trading tools – the main type of algorithmic trading, in which specialized programs automatically sell and buy positions in a fraction of a second.

    Meanwhile, nothing really new was invented – as in the more traditional financial world, namely – the stock exchanges – all of it has been computerized way back in the 1970s. Moreover, with the emergence of centralized trading platforms in the cryptocurrency field, the algorithmic trading had found its way here. Over the years the programs use had shown a significant impact on the volatility and liquidity of the certain digital coins.

    Due to the volatility nature of digital money as well as the competition and hype around them, products for algorithmic trading are becoming more and more popular. For the most part, major and most reliable exchanges, including Bitfinex and Poloniex, not only do not prevent but also encourage automated trading use on the platforms nonetheless because they receive a hefty commission on each transaction, regardless of whether the client loses or earns money.

    The head of the EAM cryptocurrency Fund Tim Enneking called the main difference between algorithmic trading in traditional markets and trading in the cryptocurrency market that even microseconds are essential in the stock market, while in the crypto-market such short time intervals do not matter. Enneking also noted that the process of algorithmic trading could not be allowed to drift. It needs close monitoring, and it can not work on its own for a long time.

    We have already told you about the strategies available for the crypto traders. Let’s have a look at how the algo trading works.

    The deep look

    Algo trading systems are used by both professionals, including the financial organizations on one side and newly-came amateurs — ordinary owners of cryptocurrencies trying to increase their capital – on the other. Most of these people had been attracted into the financial world since the crypto popularity had gone wild last year. There are three main categories of software available for it:

    • Bots with pre-written logic;
    • Bots-adviser;
    • Trained trading bots based on AI and machine learning technologies.

    Do also note that bots are not all-knowing oracles that can intuitively grasp the right trades to make – they are just convenient tools that allow traders to implement their existing trading strategies more efficiently. Since the traders vary widely in their philosophy and approach, the many bots also differ widely in their design:

    • Inter-exchange arbitrage bots (for those who use multiple exchanges).
    • Flash crash bots, which take advantage of temporary crashes in the value of a token or coin.
    • Basic trade bots, which can be configured to follow all sorts of predetermined strategies.
    • Trendline bots, which use primary technical analysis (the trend lines drawn on charts) to execute trades.
    • Index bots, which help create a diverse portfolio of cryptocurrencies that are managed much like an index fund.
    • Stop loss bots, which automatically sell at a certain fixed or dynamic price.

    It should be noted that not every bot is suited for every trader. While a basic trade bot might be a good choice for a beginner, a customizable script bot or a market-making bot is designed with the advanced trader in mind. Trader sophistication and risk tolerance should be key considerations when choosing the right type of bot to deploy.

    In the most straightforward solutions for automated trading of cryptocurrencies there are ready scenarios already programmed to that determine the bot’s actions in a specific situation. The logic of the bot can be quite sophisticated, however, to change the principles of its “behavior,” it is necessary to make changes to its core code.
    Such solutions have many advantages, including:

    • the compensation of negative feature of human factor (influence of emotions, fatigue, cognitive distortions);
    • operating at speed inaccessible to a human trader;
    • 24/7 work which increases the chances of catching the trend at its start;
    • simultaneous action with any programmed number of currency pairs and exchanges;
    • the ability to test run-in trading strategies to prove their viability.

    However, in essence, bots do not provide utterly passive income without the intervention of the beneficiary. In a long-term game, such bots may well work in the negative.

    Mainly such programs operate on the basis of technical analysis metrics: this is one of the approaches to forecasting the state of financial markets, which has a lot of followers among traders. Many traders are skeptical about free solutions. Therefore, often those who are engaged in trading on crypto-exchanges seriously, order the development of such software from specialists, or, if there are sufficient competencies, write them themselves.

    In the industry, there is a continuous arms race going on all those years. So these programs compete not only with live traders but also with their software “brothers,” which can be much more perfect and effective.

    There are also more complex systems for cryptocurrency algorithmic trading, and it seems that the future belongs to them. Such solutions use “smart” algorithms and mostly capable of self-learning. They are based on neural networks and machine learning methods that increase the depth and efficiency of analysis. Such products are more expensive and more difficult to operate.

    It should also be noted that the software for algorithmic trading of the third type — robots-advisors (do not perform transactions but give recommendations) — can refer to the bots with pre-prescribed logic, and to the more sophisticated systems based on AI at the same time. This is a fairly promising category of products for trading on crypto-exchanges: a survey of European consumers of financial services showed that 2/3 of them are ready to use robot advisors. Expert Advisor programs can be used to conduct business on the crypto exchange and in conjunction with the trust management mechanism when the broker chosen by you with the help of API (without direct access to your account) conducts transactions for you.

    Pros and cons of use

    Of course, algorithmic trading has a lot of advantages. On the other hand — it is not exactly a panacea, especially for beginners in this field. Concerning identifying insights in large data sets and response rates, algorithms using big data analysis, neural networks, and machine learning are out of the competition. However, many automated trading systems have drawbacks such as:

    • The removal of emotion and irrationality from trades.
    • Trades can be executed with higher speed to reduce missed opportunities.
    • Lower risk of data errors being entered manually.
    • Backtesting helps validate the viability of trading strategies.
    • Around-the-clock trading allows opportunities to be seized whenever they arise.

    While there are a wide variety of bots in existence (and they are customizable through scripts), choosing the appropriate bot (or bots) to implement a trading strategy is a core challenge for algorithmic crypto traders.

    The drawbacks are the following:

    • the analysis is carried out only in retrospect;
    • allow ” error of the survivor “(conclusions solely on the basis of positive results);
    • retrain and adjust trading strategies based on mistakenly identified patterns;
    • do not take into account the broader market context and rely only on the data of trading.

    You need to take into account that the purchase of a bot is a cat in a bag — the efficiency of the system will be difficult to predict and, especially, to guarantee.

    The program for algorithmic trading – should you buy or design it by yourself?

    Application of the quick strategic decision will save you time, and creation of own program will give the chance to adjust it under the requirements.

    The cost of automated software is often very high. Also, it can be filled with loopholes that allow a person or organization to avoid the scope of the law or any restriction without a direct violation of the law: if you do not know their specifics, you can lose large sums of money. High costs of ready-made software can significantly reduce profits from algorithmic trading.

    Among the ready-made solutions for algorithmic trading of cryptocurrencies, there is, for example, software Algotrader 4.0. However, building your own algorithmic software requires a lot of time and effort, and it is very likely will not be reliable.

    The HiCo Trading project team has created a promising, easy-to-use and necessary terminal to work with based on many years of trading experience.

    Moreover, It will no longer be required to use several applications at the same time – the available HiCoTrading functionality will make it possible to trade much more efficiently than before. Besides, our platform will be continuously updated and improved, which will undoubtedly provide its demand in the world market for years to come.

    Last words

    Robotic trading solutions are at least able to free a person from the routine, offer him trading strategies, ensure against loss of capital during market fluctuations. It definitely makes sense to try in the case of robot advisors. However, to ultimately give exchange transactions at the mercy of for premature.

    Contrary to popular belief, exchanges do not ban for the use of bots: on the contrary, in the cryptocurrency market trading platforms get approximately interests of all executed orders. Moreover, trading robots reduce the number of user errors and contribute to more rapid information processing.
    The Poloniex and Bittrex exchanges account for the most significant flow of altcoins trading: they have well-documented APIs, and high liquidity for almost all the currencies presented.

    Algorithmic trading has become an integral part of the cryptocurrency trading world. The easy to use yet powerful bots had given the power of algorithmic trading in the hands of everyone, regardless of skill level or experience.