Crypto markets are a tough nut to crack. This is especially with high volatility and no fixed trading time (24/7), it is a nightmare for traders. While the challenges of the market are serious, they also present many unique opportunities. Many crypto traders are turning to bots or computer software capable of trading on their behalf. Bots are flexible and can be programmed to do exactly as wanted and they can keep up with the market continuously. Bots work with algorithmic strategy. Let’s dive into the world of Crypto trading algorithm.
Are Crypto Trading Algorithms Good?
The main of using bots is that, unlike the equity market, the crypto market runs throughout the day. And it is impossible for a human being to trade continuously. The second advantage is speed and accuracy. Information can be processed and correct trade execution can be done in the blink of an eye while human beings take time to process the information and think about a strategy. Human error can also be reduced. Another factor that affects traders is emotions and biases, and bots are not susceptible to both. They trade based on algorithms. In many aspects, bots are far superior to humans.
Strategy #1: Trend follower
The most common algorithmic trading strategies follow trends in moving averages, channel breakouts, price level movements, and related technical indicators. These are the easiest and simplest strategies to implement through algorithmic trading because these strategies do not involve making any predictions or price forecasts. Trades are initiated based on the occurrence of desirable trends, which are easy and straightforward to implement through algorithms without getting into the complexity of predictive analysis. Using 50-day and 200-day moving averages is a popular trend-following strategy.
Strategy #2: Arbitrage trading
Arbitrage techniques are used in the equity markets, where buying a dual-listed stock at a lower price in one market and simultaneously selling it at a higher price in another market offers the price differential a risk-free profit or arbitrage. The same strategy can be applied in crypto where there are hundreds of exchanges listing the same coins. This is a guaranteed profit strategy especially incase of crypto markets where there can be some significant difference in prices for the same asset across different exchanges. Bots implement an algorithm to identify such price differentials, and placing the orders efficiently allows profitable opportunities.
Strategy #3: Standard mean reversion
Standard deviation indicates the amount by which values deviate on average from the mean. The higher the standard deviation, the riskier the investment as it leads to more uncertainty. A term associated with standard deviation reversion is Bollinger Bands. It is a trading indicator (which consists of 3 lines) created by John Bollinger. What do the 3 lines mean? Upper band – Middle band plus 2 standard deviations, the Lower band – Middle band minus 2 standard deviations, and Middle band – 20-period Moving Average. It can help you :
- Identify potential overbought/oversold areas.
- Identify the volatility of the markets.
Strategy #4 :Mean Reversion
Mean reversion strategy is based on the concept that the high and low prices of an asset are a temporary phenomenon that reverts to their mean value (average value) periodically. Identifying and defining a price range and implementing an algorithm based on it allows trades to be placed automatically when the price of an asset breaks in and out of its defined range. This strategy is predicated on the idea that markets have a long term trend, but as we have seen with crypto this might not always be true. Thus caution must be used while using this strategy.
Basically, any crypto trading algorithm can be coded into a bot. It can execute it with high precision, and can blindly rely on bots. No, It’s not magic, but it needs proper research as well as technical skills to code and run it (although there are a few free generic bots available). The nature of crypto markets demands bot to trade. The number of exchanges and coins is really something a single person cannot comprehend. There is a strong argument that once everyone starts using the same algorithms, profits cannot be made from such a strategy. While it might sound right, the truth is people will keep inventing new algorithms.
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