Trading 101: The Rapid Rise of Algorithmic Trading in Crypto Volatility

2021/09/23 10:30:10

The rise of algorithmic trading was primarily necessitated by the need to earn passive income and completely removing human emotions from trading decisions. This is especially true in the crypto market, which tends to be overrun by fear and greed (FUD and FOMO).

What is Algorithmic Trading?

Algorithmic trading refers to applying pre-programmed algorithms to make fully automated trading decisions, place orders, monitor and control open and pending orders. Algorithmic trading thus includes the function of automated execution of predefined orders and the function of generating orders independently. Algo-trading can be as simple as "order a purchase if the price rises above the current average," or sometimes more complex, such as entering purchase or sales orders at different prices and canceling them if specified market conditions are not met.

Why is Algorithmic Trading on the Rise?

The advantages of algorithmic trading in the crypto market are immeasurable. Here are some reasons why algorithmic trading is on the rise, especially in the crypto market.

Negative Effect of Psychology

The only human interaction is when setting up the algorithm. Typically, traders and investors are often influenced by sentiment and emotions, and often make the wrong decisions, causing much greater harm in the moment of pressure and panic. Algorithms don't have that problem. The negative effect of psychology is eliminated.

Discipline

People have a hard time following even the rules they set themselves. In times of extreme market volatility, as is customary in crypto trading, most traders tend to abandon their trading rationale resulting in losses and lost opportunities that could have otherwise been avoided.

Constant Market Monitoring

Crypto markets are open 24/7, which means traders can trade any time they want. However, since it is impossible to monitor the markets round the clock, most trading opportunities are missed. With algorithmic trading, the trading bot monitors the market for you 24/7 and executes trades when the pre-set conditions are met.

Time

While you continue your daily work (work, school, hobby, etc.), algorithms follow the markets for you and automatically perform transactions on their own.

Earning Passive Income

Not everyone intends to be a full-time trader. Algo trading helps free up your time to pursue other activities. Remember that all trading here is automated. That means algorithmic trading offers everyone the best alternative to earn passive income. All you need to do is set up the trading parameters, sit back, and let the bot do the work for you.

How does Algorithmic Trading Work?

Since trading is fully automated, human interaction is limited to the specification of trading strategies. However, given the complexity of algorithmic trading, we can split the entire trading process into two parts – order generation and order execution.

Order Generation

In order generation, different trading strategies are applied to market data in codified, defined rules of action. Here, the algorithms generate buy and sell orders for cryptos. For example, you can map and codify arbitrage strategies or other trading strategies based on technical analysis or the current market sentiment. Market data can therefore be used, for example, short-term price-relevant news or volume and price information on various assets.

The primary advantage of algorithmic trading, especially in this phase, eliminates the human error that comes with analyzing large quantities of data.

Order Execution

During order execution, buy and sell orders are implemented at suitable marketplaces using algorithms to minimize the market impact and the associated additional costs. Here, a mix of active and passive strategies is often used, in which liquidity is sometimes offered via limit orders, and liquidity is sometimes requested via market orders. As a measure of success for order execution, variables such as the VWAP (Volume Weighted Average Price) or the TWAP (Time Weighted Average Price) are suitable.

KuCoin Trading Bot

KuCoin offers its traders a trading bot that saves them the time and energy of monitoring the market constantly while ensuring that their trades remain profitable. The trading bot enables traders to execute their positions even in extreme market conditions. Since the bot monitors the market conditions and executes trades round the clock, you can seize any market opportunity that arises.

More so, the KuCoin trading bot helps to mitigate the potential risks of market volatility while benefiting from the arbitrage of price fluctuations. Note that with the KuCoin Smart rebalance bots, your portfolio will automatically be rebalanced in the event of an extreme unilateral price increase. This bot allows you to create and customize your portfolio and select the preferred threshold. The bot automatically rebalances your portfolio when this threshold is triggered.

KuCoin trading bot currently allows four trading strategies, i.e.,Spot Grid, Dollar-Cost-Average(DCA), Futures Grid, and Smart Rebalance. Here, you can use the Classic Grid Trading bot, which allows you to create spot trading using AI parameters, taking advantage of market volatility. You can also customize your own parameters by setting the 'Min. Price' and 'Max Price.'

The 'min.' is the lowest price possible for buying a coin, while the 'max.' is the maximum price for buying the coin. The Spot trading bot halts trading when the price trends outside these ranges. This ensures that your trading remains profitable.

Bottom Line

Algorithmic trading refers to trading strategies where trading is fully automated in terms of identifying and executing trades. The use of trading bots helps traders earn passive income from the crypto market while avoiding the hassle of constant market monitoring and analysis.

Stay tuned and watch the KuCoin Blog for more interesting and valuable educational content. All the best!