What is Algorithmic Trading and the Primary Strategies?

Algorithmic trading tries to eliminate the human factor and instead follows predetermined, statistics-based strategies that can be operated 24/7 by computers with minimal supervision.

Overall, computers are able to offer numerous advantages over human traders. For instance, they can stay active all day and every day without sleep. They can also analyze data accurately and respond to changes in milliseconds.

In addition, they never take into consideration emotion when making their decisions. Because of this, many investors have long since realized that machines can make excellent traders, considering that they are using the proper strategies.

This is the way the field of algorithmic trading has developed. While it started with computers trading in traditional markets, the rise of digital assets and 24/7 exchange platforms has brought this practice to a new level.

Indeed, users will still need to work out their own strategies, but when applied correctly, these methods can help traders take their hands off the wheel and let maths do the work.

What are the Key Strategies?

The main ideas behind most algorithmic trading revolve around using software to see profitable chances and jump on them faster than a human could. The most used practices are momentum trading, mean reversion, arbitrage, and a number of machine-learning strategies.

Most algorithmic trading strategies focus on identifying opportunities in the market based on statistics. Momentum trading seeks to follow existing trends, while mean reversion looks for statistical divergences in the market. On the other hand, arbitrage searches for variations in spot prices across various exchange platforms, and machine learning strategies try to automate more intricate concepts or integrate several at once. These are simple guarantees for profits, and traders will have to understand when and where to include the proper algorithm or ‘bot.’

Usually, bots are tested against historical market information, which is known as backtesting. This enables users to try out their strategy in the actual market they want to place it on, but with established movements from the past. Some dangers in doing this can include overfitting, which is when a bot is devised around historical data that doesn’t actually reflect current conditions, therefore, leading to a strategy that doesn’t produce.

Where Can You Begin Algorithmic Trading With Cryptocurrency?

There are numerous websites that provide a variety of trading algorithms, which you can then connect to the digital asset exchange platform of your choice. Quite a few services exist that can get you set up relatively quickly with algorithmic trading.

Websites like TradeSanta, Bitsgap, Cryptohopper all deliver multiple kinds of accounts that can range from free to pricey, depending on what instruments are available on them. For beginners, a free account would usually offer a multitude of options to get started, but paid accounts can be beneficial if you want to become a professional.

These websites will generally offer tutorials and other types of materials so you can educate yourself on finding the bots and strategies that are ideal for you. Although not every service is consistent with every exchange, you will find that most of these products will support the majority of the largest and most popular exchange platforms. Some even have special promotions for using their bots in connection with a specific platform, so users should have numerous options to choose from.

The Bottom Line

There are numerous other techniques and services you can explore, but this short guide should give you the basics you need to get familiar with algorithmic trading. It is essential to go slow and learn everything you can, and it shouldn’t be long before you decide whether an automated strategy is right or not for you.

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