The crypto market is by far the most volatile markets to trade in. For intraday traders, this volatility can make them smile all the way to the bank. The volatility means you can always expect higher highs and lower lows. If you know how to ride these waves, you can make a lot of money – and one sure way of doing this is automating the process through algo trading. When using algorithms to trade the stock market, you have to buy some proprietary software, get relevant permissions from the brokers and pay to gain access to historical data for backtesting of the algorithm. But cryptocurrency makes algo trading very simple and so almost anyone can do it. In fact, most exchanges have an open API which you can use for algo trading.
Crypto Trading Approaches
There are three main approaches that are used by cryptocurrency traders. These are:
• Fundamental analysis - this is when an investment in digital assets is based on the projected growth of the project behind the digital asset. For instance, a cryptocurrency that doesn’t have any real product in the market will be considered as a bad investment even if it manages to get significant trading volume
• Sentiment analysis – this is where a trader browses internet sites like Twitter, Reddit and others to establish the hottest trading opportunities of the day. For instance, news of a cryptocurrency that is getting listed on a major exchange can influence the buying decision of many traders as they anticipate prices going higher in the next couple of hours
• Technical analysis – this is when a trader studies a couple of the technical indicators (e.g. Relative Strength Indicator, Moving Average, etc.) and makes trades based on them. Traders use technical indicators to predict future price movements.
An Algo Example
When trading with algos, the technical analysis approach is the most important because it is easy to program into an algorithm and with relative accuracy too. Technical analysis tells you the direction (is the price going up or down), the valuation (are the assets undervalued or overvalued?) as well as the volatility (will the price move sharply very soon?) of a digital asset. As simple as that may sound, these are very powerful pieces of information because they can tell a trader exactly when to enter or exit a trade. For instance, here are some conditions that you can set in an algorithm:
Buy when MACD > 0 (when prices are trending up) and the RSI <20 (the currency is undervalued)
Sell when MACD < 0 (the prices are trending down) and the RSI > 20 (the currency is overvalued)
This simple example can beat the market on an interval of up to 2 months for most of the prominent cryptocurrencies. Obviously, there is no perfect example that you can plug into your exchange and expect miracles. As a trader, you may want to take some time studying technical analysis in order to know the best rules to set in the algorithm. Also, some of the rules might work for a while and then suddenly stop working so you should consistently update and improve on the algos you set.