Five Crypto Trading Algo Strategies: A Deeper Dive
Five Crypto Trading Algo Strategies: A Deeper Dive
Algorithmic trading (algo trading) is an automated system of market order execution that relies on pre-programmed trading commands or specifications. Also known as high-frequency trading, algorithmic trading can make thousands of trades each second, without human oversight.
The crypto trading algorithm takes into account functions such as volume, timing, and price when sending small portions of an order to the market. Using complex formulas, the algo trading bot makes buy or sell decisions on an exchange on behalf of a trader.
The formulas that the bot uses are a combination of mathematical formulas infused with a level of human oversight.
Still, the sole purpose of algo trading in cryptocurrencies is profit making, so the bot's key goal is to beat the market. To achieve this feat, the algorithm in use uses real-time data to trade assets like Bitcoin passively.
Below are five of the most popular crypto trading algo strategies:
1. Mean Reversion
In the world of finance, mean reversion is a theory that states that the values of securities, interest rates, and other diverse economic indicators over time revert to their historical averages.
This price reversal often happens after notable short-term price movements. All financial markets are in an ongoing state of mean reversion, moving back and away from mean average prices.
This phenomenon makes creating a mean reversion trading strategy possible. Day traders and hedge funds often practice mean reversion strategies, using it as a self-fulfilling prophecy. Whenever a market rises or falls in an unconventional fashion, the traders and investors will jump in and go against the crowd.
Over time, the crowd on the contrarian side will enlarge and the market will slide back to a manageable price level. This wavelike movement of prices towards a broader trend is also very common in the cryptocurrencies market.
The price of an asset may bounce off or across a mean average. The mean reversion algo trading bot is designed to maximize the profit-making opportunity that lies within the wavelike behaviors of crypto-asset prices.
As a rule, traders regard prices that rise above the mean as expensive. They also classify those that fall under the mean average as cheap. There will, therefore, take their positions as per these two scenarios.
The back and forth tidal movement of crypto assets needs to be high enough to give rise to profits. If the standard deviation does not give any room for gain, then the mean reversal system will fail at its target.
High volatility is therefore a critical component of the mean reversal trading strategy. A low volatility environment will bring in very low returns. Consequently, other costs such as brokerage fees or slippage costs will make the trade untenable.
While financial assets do not have a normal distribution and are easily affected by extreme events, mean reversion is a robust strategy that helps traders find an edge in volatile markets.
Ways to Trade Mean Reversion
1. Using technical indicators. There are technical indicators that highlight overbought or oversold assets. Using these levels, the crypto algo trading bot will go into the market and exit at the asset's mean reversion point. Some of the most common technical indicators used in mean reversion trading include Bollinger Bands and Standard deviation.
2. Through financial data. In the stock markets, traders will study an asset's earnings reports or PE ratios to pinpoint mean reversion opportunities. Cryptocurrency assets rarely have financial reports, but critical crypto technical data can be unearthed by studying market trends or the market cap of an asset.
3. Via economic indicators. Economic indicators such as the Japanese candlestick charts are very popular in cryptocurrency trading. They will for instance show an asset's price movement at a specific interval. The candles will also show the opening price of a cryptocurrency asset and its highest, lowest, and closing price. By studying these indicators, the trader can identify the asset's patterns and predict its reactions.
4. Via sentiment indicators. The markets become pessimistic when there are market lows. Crypto traders will, in contrast, gain more confidence as the market peaks. Sentiment indicators look for these turning points in investor confidence to locate profit opportunities.5. Pairs Trading Traders find it easier to bet on the changes in prices of two similar products than waiting for opportunities in outright price movements. Trading pairs to benefit on the spread between them is therefore a fertile ground for mean reversion crypto algo trading.
2. Momentum Trading
While mean reversion algo bots maximize on the buy low and sell high strategies, the momentum crypto trading algo bot will make moves in any market direction.
Momentum trading capitalizes on the fact that any strong market move in either direction is always followed by a lower low higher high. In the crypto markets, momentum-trading strategists will buy coins that show potential of edging higher, and dump-or sell, those that are shaky.
This strategy that seeks then uses the opportunities that lie within price movements to open and close positions. These crypto trading algo bots work on the theory that whenever there is a sufficient force behind a price move, the price trend will continue in that same direction until signals arise that show that the trend has ended.
In the crypto assets markets, items with high prices attract a lot of FOMO attention from investors and traders. This top level of attention and awareness will push the digital currency's prices through the roof. After the assets have been overbought or sold, its price momentum will change direction, lowering its price.
The momentum trading algo bot will identify a strong trend in any direction, then open a position that will make a profit when the price changes. They will also close the position when the momentum loses its strength.
The crypto algo bot never seeks the bottom or top of a price trend, but stays in the main body of the trend. They, therefore, make their profit by exploiting herding and market sentiment.
Volume: The algo trading will take into account the quantity of an asset traded to ensure that it could open and close its positions fast. Entry and exit of market positions can be tricky if the asset in question lacks a steady stream of sellers and buyers. Liquidity is therefore very important in momentum trading.
Volatility: The momentum trading bot feasts on volatility or the change in the price of an asset. Huge price swings or high volatility coupled with a robust risk management strategy can bring in huge trading rewards.
Time frame: Most momentum traders focus on short-term price movements and scalping. There are however profits to be made on longer price trends and position trading.
3. Crypto Scalping
Scalping or scalp trading occurs when a trader opens many minute transactions to profit from the myriad price movements that happen in a day of trade. Generating an upward of tens to hundreds of small short-term trades can eventually amount to a large day trading profit for a keen trader. The beauty of scalping is that it is a low-risk trading procedure.
Crypto scalp trading algo bots can make a tidy sum in a short time by initiating a multitude of trades at a fast pace. A well-polished scalping strategy coupled with patience and laser-focused entries can lead to a tidy profit thanks in part to crypto volatility and the fact that trading is everyday with no pauses.
Scalping bots are heavily reliant on technical analysis. They will use data charts and other technical indicators to take advantage of an asset's increasing trading volume.
One downside of scalping techniques is that they tend to rack lots of fees. Most of these bots are usually deployed in BTC and ETH markets because of their deep liquidity.
4. Natural language processing (NLP)
Cryptocurrency prices are significantly affected by fundamentals factors such as tweets, articles, or online trends.
NLP algo trading bots can research and interpret these fundamental signals to discover beneficial buyer sentiment. Since algorithms are already tuned to make complex trading decisions, NLP and artificial intelligence will only make them better interpreters of working trading strategies.
The machine learning crypto trading bot will, therefore, be more than an "if/then" application. It will be more refined for higher returns.
5. Order Chasing
Crypto traders order chase are often keen market players that watch out for block orders, then step in to profit from them. Once a large order is placed, they will swoop in swiftly with the assumption that the waves made will trigger volatility. To capitalize on this, tech-savvy traders have designed legal data scraping bots that dig up large order information.
Typically, order-chasing algo trading bots gauge order flow before other market players access the information. They will then swiftly place orders before competitors catch up. This way, a trader that utilizes this bot will advantageously get ahead the wave and profit.
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Read all about the Relative Strength Index and how to apply it correctly to your charts.