Feb 21, 2022 1:30 PM

We’ve all heard about algorithmic trading—the benefits and downside of it. More commonly, we have even seen and heard banks and their robots being accused of causing stock market crashes and it had to do with algorithmic trading; in one form or another. 

In a nutshell, with every trading bot (in the legacy market and crypto), it is programmed with an automated trading algorithm to perform the tasks of buying and selling volume, frequency and speed that humans are not able to do. Indeed, just like the popular saying goes – “finance has gone crazy”.

But behind all this, what exactly is a trading algorithm? And could this be the next big frontier of trading and finance? 

What is a trading algorithm?

Simply put, an algorithm is a sequence of instructions that will lead to a result, based on several parameters. In the case of a trading algorithm, this will often mean automating the taking of a position, again, based on parameters that will be price levels or indicator values.

There are different types of trading algorithms: High frequency trading, arbitrage, long/short trend follower or even mean reverting. The one thing they have all in common is that you don’t need to be there for your capital to be put at work. Everything works based on automation! 

The future of trading?

You’ve probably heard the expression, the future is now. Well that couldn’t be more true in the case of trading.  Trading algorithms have been taking over the trading floor for years now. In 2010, it even caused a flash crash on the classical market with intraday fall of around 9% for the Dow Jones.

This is of course not comparable to what we can endure on the crypto market. However, it is worth noting if only to measure the impact that these Bots can have with sufficient funds, such as those of a Hedge Fund or a pension fund for example.

Can automatic trading be profitable?

This question could be simply answered with – yes, it can be profitable but that would be too simple. There are many parameters that go into judging the profitability of an algorithm. It is for example quite easy to code a strategy that will make money, even using a moving average for example.

However, the variance in the results as well as the success rate or the maximum drawdown, which may be very high, will make such a strategy almost untenable for the average person.

What are the different types of algorithms?

High Frequency Trading

These algorithms are designed to buy and sell thousands of times in the same second and are therefore developed mainly by banks and investment funds with colossal resources.

Arbitrage Trading

Arbitrage bots are a little more accessible to the general public, but only on the crypto market. Indeed, in the classical market, such strategies remain the prerogative of large institutions and their market makers.

Trend-following Algorithm

We are entering a more accessible category, but not simplistic. It is a strategy that tries to follow a trend, whether it is bullish or bearish, for as long as possible in order to offer good prospects of gains.

What to look for when selecting an algorithm?

The first thing to do if you want to use an algorithm that is not yours is to make sure of the reputation of the platform that offers it. 

Secondly, you should pay attention to the past performance, although this does not guarantee future performance and returns, it could definitely provide you with important clues to help you make the decision. Along with that, it is important to take into consideration the success rate and maximum drawdown of the algorithms as well.

The success rate and maximum drawdown are two variables that depend solely on you and your ability to take a loss without flinching. For some, a 30% drawdown is acceptable, while for others, 10% is too high. One of the ways to withstand drawdown is to abide by the golden rule – never trade or invest with the money that you cannot afford to lose. By that, it simply means – to only do so with your disposable income. 

Finally, once you have made your choice, you should live-test with a smaller amount, and only increase your stake or trading capital as your progress. 

How to get started with crypto algorithmic trading? 

Algorithmic trading solutions are perfect for the traders and investors who don’t have the luxury of time to sit behind screens, keeping track of the market. For the traders, it can be used to complement manual trading strategies to help increase the opportunities and gains from the market. For the investors, algorithmic trading can be used as an investment tool—generating a passive income over time. 

At Superbots, you will find a suite of automated algorithmic trading bots that help you trade on decentralised exchanges (DEX). Not only will you be able to access some of the best bots in the crypto market, there is no KYC or account needed, it’s fully on blockchain, highly secure and audited. The best news of all? There are no fees for deposits and withdrawals. The system is solely based on performance fees and transaction fees. 

In the event when there is a profit, a performance fee of 15% will take place and it will be split amongst: developers, projects, token burning and staking of UBXT (the token that powers Superbots). In summary, it’s a win-win situation for all involved; the ethos of blockchain!