A trading algorithm, also known as a trading bot, is a computer program programmed to execute trades in the crypto market according to a defined strategy. Trading Algorithms have a few advantages that makes them attractive to investors. They can run continuously. Trading Bots can work constantly, making and placing trades at any time of the day. Trading Algorithms eliminate this problem.
It removes emotions from the trading process. Trading is done by the algorithm based on market data, no emotions involved. The final advantage is that a bot can execute a trade extremely quickly, because they can enter and exit trades at the blink of an eye.
Types of Trading Algorithms
The types of trading algorithms you see on exchanges, are usually one of three types.
Algorithms with Pre-installed Logic: These are the simplest kinds of bots, programmed to take specific actions given certain specific scenarios on a platform. The logic that the algorithm runs on can be simple or complex, depending on how it is programmed. However, to change its behavior, changes must be made to the code. However, if it will be used for a long time, changes must be made to its code as the market changes over time.
Smart, Educatable Algorithms: These kinds of algorithms are self-learning and artificially intelligent. They are based on machine learning and neural networks, that add depth to the analysis of the market, that is the algorithm keeps learning and changing as it analyses the market in detail.
Trading Advisors: These kinds of algorithms do not place trades, rather, they give recommendations based on the analysis of the market. They are usually an amalgamation of the first two types of robots, that is, programmed with specific instructions while having the capacity to learn and make adjustments to the programmed strategy. This seems to be the most promising, with a large number of high-volume traders reportedly considering adopting this system.