An algorithm is a set of clearly defined instructions that carry out a process or task. When a human trader is unable to handle a large number of trades, intelligent algorithms are the answer.
Algorithmic trading — also known as black-box trading, automated trading, bot trading, and algo trading — is the use of computer programs to place trades, which aim to generate huge profits and are executed at a frequency impossible for human traders to achieve. Trading algorithms can analyze quotes and trades, and identify opportunities in the market which are potentially likely to become smart, savvy, and profitable trading decisions.
Algorithmic trading is centered on a set of mathematical rules that are consequently based on timing, quantity, price and other models. By negating the human effect on the trading process, algorithmic trading makes trading easier and more systematic, and helps make markets more liquid. Recently, algorithms have gained much popularity in the trading sector, particularly with the 24/7 crypto market. With algorithmic trading, investment has more control over the trading processes, and cuts costs, thereby increasing the profit margin.
Benefits of algorithmic trading
- Trades are executed at the best prices in the market.
- High-frequency trading — a method incorporated in new algorithmic trading that capitalizes on placing a considerable number of orders at fast speeds across multiple decision parameters and various markets as well based on the programmed instructions.
- Significantly educed errors — the risk of human error during trading is considerably lowered by algorithmic trading.
- Concurrent checks on numerous market conditions — a huge factor in determining the amount of post-trade profit. Different market conditions mean different trading scenarios and the algorithm determines what the conditions indicate, enabling smart trading with profit-making.
Like every other system, algorithmic trading has its own risks and challenges that smart traders need to comprehend, including system failure, network connectivity faults, time lag, and incorrectly-coded algorithms. Furthermore, it is worth remembering that no algo trader is an island – if you can algo-trade, so can others. Cryptoassets are live 24/7 and prices can fluctuate in seconds, so you need a highly sophisticated algorithm to tame all trading challenges. The more sophisticated the algorithm, the more stringent back testing is required prior to putting the “algo” in “algo trading”.