Wall Street Bot. What is algorithmic cryptocurrency trading?

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The industry around digital money not only transforms the markets we are used to, but also quickly adopts their technological achievements. Borrowing went for innovative solutions used in exchange trading. Algorithmic cryptocurrency trading is gaining momentum today. Let’s impartially take a look at how effective it is and whether it should be mastered by novice traders.

According to ZeroHedge, 84% of transactions on the world markets are carried out by high-frequency trading tools – the main type of algorithmic trading, in which dedicated programs automatically look for opportunities to earn money, sell and buy positions in a fraction of a second. In other words, the main players involved in the process are robots, and in most cases, they do business with each other.

In the “old” financial world, exchange activity has been computerized since the 1970s. With the emergence of centralized trading platforms in the field of cryptocurrency, algorithmic trading moved here too. It already affects the volatility and liquidity of the coins. In particular, industry analysts are concerned about how noticeable the impact of bots on the bitcoin rate is.

Due to the volatility of digital money and competition in the business around them, products for algorithmic trading are becoming increasingly popular. On the whole, the large (and most reliable) exchanges, including Bitfinex and Poloniex, not only do not impede automated trading, but also encourage it. At least because they receive a commission from each transaction, regardless of whether the client loses or earns money.

In cryptocurrency trading, various strategies are possible. The main ones are arbitrage, which involves making money on the difference in the price of an asset in different markets (e.g. on two exchanges), and market-making, that is, playing courses of coins and their derivatives.

Algorithmic trading systems are used by professionals, including those on financial organizations, and by “amateurs” – ordinary owners of cryptocurrencies who are trying to increase their capital. Solutions of this kind vary in the degree of complexity and principles of the structure. There are three main categories of software for working with crypto exchanges:

– bots with pre-installed logic;

– educable trading robots based on AI technologies and machine learning;

– robot advisors.

Let us see what is the difference between the abovementioned categories of trading software.

Simple bots

The simplest solutions for automated cryptocurrency trading are based on ready-made scenarios that determine their actions in a given situation on a platform. The bot’s logic can be quite sophisticated, however, in order to change the principles of its behavior, it is necessary to make changes to its code.

Such solutions have a lot of advantages, including:

– compensation of the human factor (the influence of emotions, fatigue, cognitive distortion);

– the speed of operations inaccessible to man;

– functioning 24/7, which increases the chances of catching the trend in the bud;

– simultaneous work with any programmed number of currency pairs and exchanges;

– the possibility of test run-in of trading strategies for their viability testing.

However, this is a regular program or script that acts on the basis of the triggers provided for it and their combinations. As a result, it is required to regularly make adjustments to the bot’s logic for effective work. Bots do not provide completely passive income without the intervention of the beneficiary. With a long time horizon, such bots may operate at a loss.

Mainly, such programs operate on the basis of technical analysis metrics: this is one of the approaches to forecasting the state of financial markets, with many followers among traders. Technical analysis in relation to cryptocurrencies is often criticized with the emphasis on the fact that it is problematic to build reliable forecasts without taking into account external over-the-counter factors.

There are a large number of ready-made bots, as well as platforms for building your own applications of this kind like CryptoTrader. Many traders are skeptical about publicly available solutions: it is logical to assume that no one will sell a $50 money-printing machine that works smoothly. Therefore, it is common for those who are seriously engaged in trading on crypto exchanges to order the development of such software from specialists. Or, if there are sufficient competencies, develop it themselves.

A bot has certain advantages over humans, however, the arms race has been in the industry for years. So, such programs compete not only with real traders, but also with their software “brothers”, which can be much more perfect and efficient.

Smart robots

There are also more complex systems for algorithmic cryptocurrency trading, and it seems that the future belongs to them. Such solutions are used by “smart” algorithms and, as a rule, are 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 software for algorithmic trading of the third type – prompting robots (do not make deals, but give recommendations) – can be referred to a number of simple bots with a predetermined logic, as well as a number of more sophisticated systems based on AI. This is a rather promising category of products for trading on crypto exchanges. A survey of European consumers of financial services showed that two-thirds of them are ready for the use of robot advisors. Advisory programs can be used for conducting of business on a crypto exchange and in conjunction with a trust management mechanism, when the broker you have chosen with the help of an API (without direct access to your account) conducts transactions for you.

“SIGNALS” project is among the most interesting projects in the field of intellectual automation of crypto trading. According to the creators, it is called upon to democratize algorithmic trading on digital assets exchanges. The service is a platform on which you can create your algorithms for algorithmic trading and signals by which trading software should take action, and then use them in practice with the help of machine learning algorithms. In addition, users can earn on their signals by sharing them with other ” “SIGNALS” customers in exchange for SGN tokens.

Is the software worth the effort?

On the one hand, algorithmic trading has a lot of advantages. On the other hand, it is definitely not a panacea, especially for beginners. From the point of view of insight detection in large data arrays and speed of response, algorithms using big data analysis, neural networks, and machine learning are out of the competition. However, many automated trading systems have drawbacks besides those listed above, for example:

– carry out the analysis only in retrospect;

– make a “survivor’s mistake” (conclusions made only on the basis of positive results);

– retrain and correct trading strategies on the grounds of erroneously detected patterns;

– do not take into account the broader market context and rely only on the auction data.

But specialist from FXOpen warn that it is necessary to take into account the fact that the ready-to-use bot, in a certain sense, a pig in a poke  – the efficiency of the system will be difficult to predict and, especially, to guarantee. We should not forget that the grandees of high-frequency exchange trading, including Jump Trading and Tower Research, have come to the world of cryptocurrency, and artificial intelligence trading platforms are constantly being improved. And it is the top market players who will skim its cream off.

Today, robotic trading solutions are at least able to free a person from the routine, offer him/her trading strategies, insure against loss of capital during market fluctuations. It absolutely makes sense to try robot advisers in practice. However, it is premature to provide full control over exchange transactions to the software.

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