What is Algorithmic Trading?

DateMarch 11, 2021
Reading Time5 min
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Mathieu Hardy
Chief Development Officer
Algorithmic trading has been around the block for a while now, but what is it? How does it work? And most importantly, how can you use it for your own profit?
What is algorythmic trading?

Algorithmic trading is an age-old financial practice dating back to the 70s, where it was used professionally by the New York Stock Exchange. However, it has become far more commonplace since then, with even retail traders engaging in such behavior. In particular, crypto trading sees a great deal of this, as it is at the heart of fintech. But what is algorithmic trading, and how can you take advantage of it?

The basics

Algorithmic trading is the process of using automation to buy and sell assets or goods, meaning that the individual does not need to constantly make every decision, saving both time and energy. These are handled by programs that typically follow a complex set of rules examining trading prices, times, market cap, and previous price activity. These programs then execute trades based on these parameters, with a level of consistency that human (or manual) trading simply cannot match.

Some algorithms use quantitative trading (or “quant” trading) as well, which means they utilize even more advanced mathematical and statistical models to locate promising opportunities and steer clear of pitfalls that may go unspotted by humans. "Quant" is just a nice way of saying "even harder math. And it is thanks to computers improving and the cloud offering "elastic" computing capacity (that you only pay when you use) that it has become cost-efficient to run the numbers to compute the best portfolio allocations. Before "Cloud Computing", it would have been too costly to get the hardware to run such calculations on so much data.

One of the benefits of using this method when it comes to crypto trading is that, unlike the stock market, the crypto market is active 24/7, and as no human can be awake and alert for 24 hours, there are bound to be missed opportunities. But a computer program never sleeps, so it can monitor the financial landscape indefinitely and never drop in its accuracy.

These specialized programs are designed with a set of important financial principles. In many cases, they are also fed large quantities of data which they then analyze and use to make informed and dynamic decisions.

These algorithms can be built to navigate the crypto market, with all its quirks factored in. For instance, as the crypto industry is new compared to other financial markets (such as FOREX or commodities), it is more volatile. As it is active 24/7, it moves in a very different way from traditional markets. These are aspects that are carefully considered when building such an algorithm.

How does it work?

How does it work?

Each algorithm will work differently as they will all have different parameters set, with programmers and economists deciding on varying priorities. The OSOM Autopilot is a crypto portfolio construction algorithm that uses algorithmic and quant strategies to examine market price dynamics. It then acts to seek profitable situations and distance itself from drawdowns; percentage changes between the peak and low price of an asset, sometimes measured by the time between peaks. It focuses on drawdowns to reduce the portfolio risk profile, which has the interesting side effect of increasing returns too.

Benefits of algorithmic trading

Benefits of algorithmic trading

There are three key benefits to using this method. The first is that an algorithm never sleeps, and so it is always monitoring the ever-changing crypto landscape, scouring the charts for the best outcomes.

The second benefit is that an algorithm saves you the time and stress of trading. Every retail trader knows the tension and mental strain that comes with partaking in the market. It often requires an immense amount of effort to make consistent and informed decisions. But a crypto trading app can do this with ease.

The third benefit is that algorithmic trading is an emotionless process, where programs look at cold, hard data to precisely execute trades. Emotion is an aspect of all activities that humans partake in, most of all trading, which can sometimes be detrimental to success. But computerized systems do not suffer from this fault.

See how it compares to other alternatives here.

Is algorithmic trading safe?

Is algorithmic trading safe?

As with all forms of trading & investments, there are some risks that each person should weigh on an individual basis. For instance, regulatory interference, technical malfunctions, and market manipulation are significant risk factors that should be considered. Economic collapse and crypto volatility are also essential to keep in mind. But recognize that all these risks exist even when manually trading, and they are risks that every trader faces, from the retail trader to the hedge fund specialist. So, with those in mind, consider algorithmic trading to be just as safe as other methods. It is even used by the top two richest hedge funds in the world: Bridgewater Associates and Renaissance Technologies. In other words, this is a tried-and-tested method; it is by no means experimental.

However, recognize that safety does not equal profits. This is very much a safe method of entering the market and getting a well-diversified portfolio, but that does not guarantee financial success. No trading method, protocol, product, or system, can ever guarantee profits, and if any claim to, they should be met with immediate scrutiny.

Choosing the right crypto trading provider

Choosing the right crypto trading provider

You should look for a provider who will minimize risk as much as possible while using the best strategies for attaining profits. Risk can often be offset by various factors such as diversifying assets and avoiding assets with low volumes.

The OSOM Crypto Autopilot is an algorithmic portfolio builder that is streamlined to focus on stable growth. The Autopilot minimizes risk by only engaging with assets that meet strict criteria, such as:

  • A high market cap
  • High liquidity
  • No privacy coins (Dash, Monero, PIVX)
  • No joke coins (Dogecoin, Bananacoin)
  • No forks (Bitcoin Cash, Ethereum Classic)
  • No stablecoins (Tether, DAI)
  • No commodity-backed coins
  • No derivatives or synthetic products

OSOM also minimizes risk by highly diversifying across Crypto assets and even manages to attain a ratio higher than even S&P500.

Final words

Final words

Crypto trading is a complex activity, and choosing the right methods can be challenging. With the industry’s volatility due to its relative youth and the fact that the market never closes, algorithmic trading is undoubtedly an appealing option that retail traders should certainly consider, as they can reduce the risk and stress involved with manual crypto trading strategies.

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Mathieu Hardy
Chief Development Officer

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