Can algorithmic trading increase profitability in digital assets?
Digital assets are one of the most lucrative trading instruments, especially during tough economic times. There are different trading strategies to employ that will increase profitability, recession or not. For example, Arbitrage has been used for many years across various industries and has proven to increase profitability even in times of economic downtrends.
The article below was originally published on Active Rain.
Even during tough economic climates, digital assets have been proven a lucrative trading instrument. Recession scares most traders away and can be alarming to grow one’s portfolio. Fortunately, there are trading strategies that can be considered viable and profitable. Such strategies will help any trader weather different economic trends.
One example traders can employ is hedging. Although it is considered a reasonable practice, it does not increase profitability, rather, it minimizes potential losses. For traders looking at increasing their profits in different economic climates, algorithmic trading and arbitrage are strategies that can be taken advantage of. This strategy can also be applied to other trading instruments
Growing assets through arbitrage
Arbitrage trading is a strategy that takes advantage of price asymmetries of assets in different exchanges. Because of the growing number of exchanges, instances of price discrepancies are highly probable in digital assets and exchanges that are mainly driven by demand, locale, and exchange rates.
“An arbitrage opportunity is an investment strategy that guarantees a positive payoff in some contingency with no possibility of a negative payoff and with no net investment,” according to Finance, a book by Philip H. Dybvig and Stephen A. Ross.
For digital assets to grow using arbitrage, the value of the asset is not essential, instead, the price asymmetries of the asset among exchanges are what makes this strategy profitable. This is due to market inefficiencies and traders can grow their assets through these contingencies. Exchanges keep growing globally, increasing the chances of market mispricing. Such events lead to arbitrage opportunities.
How algorithmic trading help increase profitability
Arbitrage trading can be profitable even for new and seasoned investors but this strategy requires a lot of time, studying and comparing different exchanges and looking for opportunities that could arise. No human can keep up with all the exchanges; thankfully, automated systems through algorithmic trading can catch these contingencies.
“Algorithmic trading refers to the use of computer programs to automate one or more stages of the trading process: pre-trade analysis (data analysis), trading signal generation (buy and sell recommendations), and trade execution,” according to a study by Hendershott and Riordan published in Cambridge University.
Algorithmic trading uses artificial intelligence and trading bots to significantly improve access to opportunities, by giving traders the ability to gain profits even without being directly involved in the trades. Algorithms are used in these automated systems to initiate trades instantly once an opportunity arises. This technology offers traders reduced risks and can be utilized by all traders.
“In arbitrage and algorithmic trading, speed is the crucial success factor. With the use of advanced technologies such as algorithms and artificial intelligence, traders can take advantage of smart automated trading,” says Tony Jackson, Chief Executive Officer of Jubilee Ace, an automated arbitrage trading platform.
Apart from helping traders increase profitability, arbitrage and algorithmic trading can also help in improving market inefficiencies simply by initiating the trade. “Arbitrage not only increases profitability for the trader, it also encourages market liquidity and hence contributes to the overall health of the market,” adds Jackson.
Algorithmic trading improves market inefficiencies
Both arbitrage and algorithmic trading take advantage of price differentials through market inefficiencies. Once these price discrepancies are spotted by the automated system, exchanges are now aware of the current market inefficiencies. This can also lead to the overall liquidity of markets.
“[I]ncrease in arbitrage activity is associated with a reduction in market order imbalance and an improvement in liquidity. Overall, these findings indicate that arbitrageurs tend to trade against market order imbalance and thus enhance market integration and liquidity,” says Dominik Rösch, a researcher at State University New York-Buffalo in a research seminar series.
Takeaway
There are different strategies that traders can take advantage of especially when growing digital assets. Arbitrage has been used for many years across various industries and has proven to increase profitability even in times of economic downtrends. Algorithmic trading may be still new, however, it closes market gaps and promotes liquidity in markets.
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About Jubilee Ace
Jubilee Ace Limited is an advanced data analysis company that specializes in multi-sector arbitraging opportunities around the world. Founded in the British Virgin Islands in 2018 with a paid-up capital of US$50 million, we are a company that specializes in arbitraging across a wide range of sectors. Jubilee Ace Limited began with traditional commodities trading arbitrage on exchanges before expanding and venturing into sports arbitraging and cryptocurrency arbitraging. With a proven track record and a successful business model, Jubilee Ace Limited improves on and refines the data it extracts and transforms them into monetizable strategies and actionable market decisions, culminating into a steady portfolio of low risk, lucrative investments.
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