Online algorithmic trading software refers to a computer program that uses a number of indicators to identify trends upon which it automatically executes trades. This approach to trading has traditionally been used in the commodity and currency markets by hedge funds and it is now increasing in popularity in the crypto space. Experts believe that at least 84% of transactions on the markets are down by algorithmic trading software. Exchanges charge a fee for every transaction so they encourage the use of algo trading software.
There are three main types of algorithmic trading software:
• Bots that have a pre-installed logic
• Robot advisors
• Educable bots (based on AI and ML)
Let’s have a look at each of these in greater detail.
Bots with Pre-installed Logic
Bots with pre-installed logic are also referred to as simple bots. The simplest way to use algos in cryptocurrency is to use software that is programmed in ready-made scenarios. How these algos respond to any given scenario is usually pre-programmed into them. The logic of these algos can be extremely sophisticated and changing some of its principles would require changing the code. Simple bots have lots of advantages, the biggest of which is it helps to eliminate human emotion in the trading process. These algos also work 24/7 so it increases your chances of catching a trend, especially in the crypto market which is open throughout. The biggest downside of these algos is that you will have to make consistent updates to its logic for it to continue to work optimally. These can therefore not be thought of as a means of achieving passive income. In fact, if you use these algos for a long time without bothering to change the logic with time, you will end up making losses.
Educable bots are also referred to as smart advisors. Because of the complex demands of algo trading in cryptocurrency, there is a need for algos that are capable of learning with time and that is where smart robots come in. Robot advisers use neural networks and machine learning to increase the efficiency and depth of their analysis. For instance, an educable bot might be based on the probability of something happening. Let’s say that the price of Etheruem rose in the last two days. The question then could be, what is the probability that the price will continue rising? Based on the probability the algo computes, one can make a trade decision. Because of this complexity, these algorithms are not only expensive to buy but also costly to maintain.
This is the third type of algorithmic trading software and they are also referred to as prompting robots. As the name suggests, they do not make automated trades. Instead, they advise trade on the trades they should take. Robot advisors have been used in the forex markets for many years and they are very applicable in the crypto market as well. These robot advisors give signals which can be used to make the trades but it is also possible to earn an income by sharing your signals with other traders at a fee.
Online algorithmic trading software helps the trader by freeing them from the routines of trading and insures them from the loss of their capital. It is, therefore, a good idea for every trader to try algos.