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Automated Trading – What is it?

During the entire month of March, we will be taking a closer look at the world of algorithmic trading in a series entitled Automated Trading which will be broken down into 5 articles:

 

  • What is it?
  • Backtesting in’s and out’s
  • How to become an algo dev?
  • Top successful Algorithms
  • Human VS Bots: Who’s the winner?

 

Without further ado, let’s dive right into the first topic, what is a trading algorithm?

 

What is an algorithm?

Simply put, an algorithm is a sequence of instructions that will lead to a result, based on parameters optimized by the developer.In the case of a trading algorithm, we will mainly focus on the ability to open positions automatically, without the need for human presence and being connected 24/7.

There are of course several types of trading algorithms, such as high frequency algorithms, arbitrage robots, trend-follower or mean-reverting.

 

How does it work?

High frequency trading 

These algorithms specialize in buying and selling assets in an extremely short period of time, less than a second. The goal of this algorithm is to be the first to buy and sell a fraction of a second later at a small profit. This type of algorithm can sometimes take thousands of trades in less than a second and are mostly reserved for large financial institutions.

Arbitrage bot

This type of algorithm takes advantage of slight differences in quotes between trading platforms to profit from them. To put it simply, it consists of buying an asset on one platform and selling it on another. On the classic markets, this is also reserved for large institutions, but it is much more affordable on the crypto market.

Trend – follower bot

Here we enter into something more classic. It is often the automation of a manual trading strategy already well established in order to save time and efficiency. This type of algorithm tries to enter a position at the origin of a trend and capture as much profit as possible before the reversal.

Mean – reverting bot

Unlike a trend-following algorithm, a mean-reverting bot will take a position when prices deviate “too far” from an average, assuming that in the longer term, prices are leaning towards their average. There are simple ways to code these algorithms using moving averages.

 

Some advantages?

Control of your emotions

A bot has no emotions, which can sometimes negatively influence the human trader. An algorithm will always make the same decision regardless of the market, it is up to you to program it correctly.

Efficiency

No matter how fast you are, an algorithm will always be faster than you, which allows you to enter a position at the best price.

 

Conclusion

Now you know what a trading algorithm is and how the main types of bots work.

Next week, we’ll focus on the steps you need to take to become an algorithm developer.

See you next week!

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