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Algorithmic (Algo) trading is a great way to improve your market responsiveness. This style of trading has been in use by professional stock traders for decades due to its effectiveness. Now, crypto traders can enjoy advanced algorithmic trading options to improve their ROIs as well. Here is some valuable insight into what algo trading is and why it may be a great fit for your strategy.
Algo Trading is a term that describes the method of executing buys and sells using software that monitors for pre-set criteria. Users can set up certain scenarios and when the parameters are met, the trade will execute. As you could imagine having a 24/7 trade partner monitoring the market for your exact conditions can help to improve your ROIs. At the very least it will help you to fine-tune your trading strategy to get better results.
Trading algorithms come in many forms. The best ones will let you create your trading strategy using a huge selection of indicators. Setting up the parameters of your algo trading strategy can require you to use charting tools and technical analysis. Both of these skills take time to learn in their own right.
Setting Up Parameters
There are so many different indicators you can use to set up your trades using the algo trading option. For example, you could set your algo to trade at certain price points. You could also set it to buy or sell based on the percentage of movement or rate of change. There are even trading algorithms that let you execute trades for assets based on other markets such as Bitcoin's movements.
Algo Trading Offshell Options
The most common type of trading algo is off-shelf options. These algos come with a variety of easy-to-select pre-sets. This approach is ideal for new users because it can require a lot of technical and training skills to set up a trading algorithm from scratch. Off-shelf options are quick and can be tweaked to meet your particular needs.
The best trading algos will offer a variety of preprogrammed options to users. Notably, these options aren't designed to be perfect. Instead, they are meant to give you a head start in dialing in the exact program you desire. As such, you can leverage items such as price movement to your benefit.
The backtesting feature is ideal whenever it's available. This feature enables algo traders to see how their algorithm would have varied over past market conditions. This testing method is excellent because you are using accurate and often recent market data.
Trading Algos that include the backtest feature are ideal for new users and those who haven't mastered their algo programming yet. You can run it through a previous market scenario and then refine and adjust the protocol to improve returns. Once you think you got everything at its peak, you can then use your trading algo on the market in real-time.
Trading Algo API
Your trading algo application programming interface (API) is how it communicates to exchanges. It is vital you stick with reputable algos that have established APIs as using a bad one can leave you open to hacks and other risks. The best trading APIs will connect to a variety of exchanges.
Advantages of Algo Trading
There are a lot of great reasons why you may want to consider integrating a trading algo into your overall crypto strategy. These handy tools are a great way to save time. Anyone who has traded cryptocurrencies knows that they are volatile and in a minute, the entire scenario can change.
Trading algos help you to remain on top of this volatile market. They lower your maintenance requirements and improve your responsiveness. Here are some of the other top reasons why algo trading makes sense.
Reduce Your Loss Potential
One of the best reasons to consider algorithmic trading is to lower your risk exposure. People often think of trading algos in terms of making trades to gain returns. However, this software is also used to prevent losses. Traders use combinations of stops and limits to ensure they don’t wake up to severe losses.
Remove Emotion from Your Trading Strategy
Trading algorithms help to remove emotion from the trading experience. As a new trader, it can be difficult to remove FOMO (Fear of Missing Out) from your trading repertoire. The problem is as human beings, and especially as new traders, it can be tempting to go for that long shot with major potential.
The problem with this approach is it's a lot like playing basketball and only taking half-court shots. You may get lucky but you are not going to beat a player who takes layups all day. Trading algos make sure you get the layups and avoid the long shots.
Along that same line of thought, trading algorithms eliminate human error. There are times as a trader that you will input things incorrectly. These mistakes can lead to stress or in major incidents, severe losses. Human error can be blamed for a decent amount of new trader losses.
Trading algorithms act in a methodical and preprogrammed manner. They don’t get swayed by social media posts or promises of super-high returns. They simply execute code which makes them less biased and more consistent which are two excellent characteristics for a trader to possess.
Maximize Your Exposure
Another reason why algo trading helps you to improve ROIs is that it enables you to catch very rare market conditions and events. You can set your trading algo to execute a trade at a meager price. In some rare incidents, trading algo users have caught flash market crashes where cryptos have sold for a fraction of their price for split seconds.
Flash crashes are unusual but do happen. In many instances, it is trading algos that kick these into action as certain market conditions will usually set off a wave of sell actions from trading bots across the market. Having your algo set to catch these glitches can be a great way to secure a healthy windfall.
Add a Trading Algo to Your Toolbox
Trading algos aren't for everyone as many of these options charge a fee or subscription for use. However, they are perfect for the person who wants to conduct more trades without donating more time to market analysis and monitoring. For this reason, you should consider trading algos as an essential tool moving forward.