Contents:
In arbitrage trading, you take advantage of mispricing across exchanges to collect risk-free profits. With hundreds of exchanges, it is almost guaranteed that prices for the same asset will differ from one exchange to the next, making it simple enough to buy the asset at a lower price at one exchange, and then sell it immediately for a profit at another exchange.
Of course, to take advantage of these price differences, you need to be quick since they might only exist for a few seconds. If you are just getting started with coding a bot for algorithmic trading, you should know there are quite a few open-source trading bots already available to use as a codebase.
A few of the most popular and well-known free, open-source bots include Gekko, Zenbot, and Freqtrade. Arbitrage has been mostly taken over by high-frequency traders using powerful servers and latency-free connections. Remember though that while algorithm trading is automatic, it still needs to be monitored. Market conditions can change, and the algorithm will continue trading, even if every trade is a loss-making transaction.
To learn more about how to trade and invest in digital assets, subscribe to Bitcoin Market Journal today! Join , blockchain investors who subscribe to our newsletter, and find out what it means.
Why Trade Using Bots? Algorithmic Trend Following Systems If you are experienced with technical analysis from other assets, you likely already recognize trend following systems.
Mean Reversion While markets can and do trend strongly at times, these strong trends are outliers, and a move back to the mean or average levels almost always follows. Standard Deviation Reversion The idea of standard deviation comes from statistics, and it is simply an average movement away from the mean. Algorithmic Arbitrage Trades Arbitrage has been one of the most popular and most successful algorithmic trading opportunities. You must make sure that your backtest is as realistic as possible. You can do so by taking into consideration latency, slippage, trading fees. You can collect high-quality market data by accessing exchange APIs.
Libraries like CCXT can allow you to interface with a bunch of exchanges. Predetermining the trading strategy that your bot will follow is critical. In this stage, you specify the logic and calculations that will help your bot to determine when and what to trade. After creating the strategy, you must backtest it to see how it performs.
The first blockchain / cryptocurrency-based hedge funds have also appeared. The only thing missing was an institutional-grade algorithmic trading software that. Put very simply, a trading algorithm or strategy is a set of rules that, together, define when trades should take place. The algorithm helps a.
We will talk about the strategies that you can implement in a bit. The next step is to execute it in real-time. In this stage, the logic that you have hardcoded into the bot will be converted to API requests that the exchange can understand. Some bots may even have allowed you to simulate your strategy in real-time with fake money.
Now that you hard-coded the strategies and tested them out in the real-world, its time to finally automate the entire process. You need to set-up a job scheduler to execute your trading strategies automatically. We have touched on this point a little before, but there are a lot of functions that a well-executed bot can conduct for you like rebalancing, portfolio management, data collection, smart order routing, etc. So, when it comes to choosing and coding your bots, you must follow the basic rules of automation:.
Repetitive admin tasks consume a lot of time and effort.
One of the best ways where bots can help with repetition is in periodic rebalances. So, you have two options:. Timing and achieving a high degree of accuracy in your trading is extremely necessary for trading. Every single trade that you make can have an enormous impact on your potential earning.
The bot can be easily programmed to monitor the market and execute a trade at the correct times. Plus, imagine the headache if you actually have a well thought out and diversified portfolio! The amount of research you will have to do every single day may be impossible for you to do single-handedly. Plus, as we have mentioned before, the trading process has plenty of repetitive and cumbersome tasks.
A trading bot can efficiently conduct these repetitive tasks throughout the day and make the process much simpler for you. As we have mentioned before, the cryptocurrency market never shuts down.
While this may sound amazing, the reality is that the price can change around the clock. Unfortunately, this means that to make sure that you are leveraging your funds in the best way possible, you will need to be awake all the time, carefully reading the price charts.
It seems pretty easy-to-understand, right? However, the execution of this trade could be nearly impossible. This is just one of the many examples of the several complexities that should be factored in while training.
Some strategies could be almost impossible to implement. Trading bots could be used to automate these complex and seemingly impossible strategies with ease. Here are some strategies that you can hardcode into your bots. The content for this section has been sourced from this article.
This assumption holds true both for traditional and cryptocurrency markets. The reason why this happens is because of the overall market psychology. A momentum investor judges the ebb and flow of the market by its momentum. An ideal scenario is to ride a positive momentum wave with your assets and then immediately sell them off when the market momentum reverses.
The core philosophy behind this is the belief that the prices of an asset will spike above its average and then run out of momentum and fall down. In this situation, the timing of the buy-in and sell-off is critical. The price of an asset can vary in different exchanges. This mainly happens due to fragmentation in price across marketplaces. With the Arbitrage strategy, you will be able to make a profit by buying and selling on exchanges simultaneously. To exploit these price differences, you will need to buy and sell X, almost at the same time. Algo-trading was developed so that traders do not need to constantly watch an asset and send simultaneous orders manually, which is a difficult task.
Driven by immense potential and greedy speculation, the altcoin market is extremely volatile. Seeing altcoins rise or fall by 20 to 30 percent in a day is nothing unusual for the market. These fluctuations present enormous opportunities for traders. Money never sleeps in the altcoin industry.
Unlike traditional markets, the digital coin market has no closing time. The altcoin industry is younger, and thus less saturated with algorithmic trading activities compared to traditional markets. Bitcoin algorithmic trading functionality can be used to help traders know when to trade and how to trade. Algorithmic trading can help traders figure out the right time to make a trade based on many variables like volume, price, momentum, etc.
Arbitrage trading is the concurrent buying and selling of an altcoin to profit from its price imbalance. This strategy is done by exploiting the price differences of altcoin exchanges.
For instance, if a trader buys bitcoin at ZB. While a human is capable of pulling this off, an algorithm works a lot better, faster, and more efficiently. A market maker is a trader or a firm that buys and sells assets for its own account. A market-maker makes a profit in two ways: by raising the price of an undervalued altcoin or by lowering the value of an overpriced altcoin.