Crypto Algorithmic Trading — Everything you need to know!

Since the advance of computing technology is far more efficient than manual human endeavour, it is of no surprise that digital systems become leading bedrock in finance for trading. According to statistics, roughly 85% of stock market trading in the US is driven by algorithms which impact on when and how to execute the best trades. In other words, advanced and sophisticated machines rule the trading world. And, The Cryptocurrency Market is not excluded.

So, which Algorithmic Trading blankets Crypto Market? We cover all in the following.

BASIC KNOWLEDGE OF CRYPTO ALGORITHMIC TRADING

Definition: Algorithmic trading (aka algo trading) refers to the trading of financial assets via computer programs using a set of specific rules. These rules, usually mathematical formulas or algorithms, will automatically decide when and how trades are executed or on exchange.

Algo Trading in Cryptocurrency space holds the following features:

• Infant market: Crypto Market is extremely young and far less saturated than other financial markets although there are thousands of coins, tokens and transactions active every single day.
• Volatility: being an infant market, cryptocurrencies are extremely volatile and are highly susceptible to erroneous price movements on a daily basis.
• 24/7 access: You can trade cryptos anytime, anywhere cuz this market is open all day.
• Retail — Driven: Rarely does the cryptocurrency market have institutional participation, it brings an excellent prospect for retail investors to get ahead of the curve and execute strategies in a less saturated market.

4 COMMON COMPONENTS OF ALGORITHMIC TRADING

1. Data — information and data is the key of algorithmic systems. The data used include structured data (like CSV files, spreadsheet,…) and unstructured data (such as news, media, audio and video).
2. Model — Model reflects how the real world is perceived by algo trading systems. They are formed on the basis of financial models which are to infer the dynamics of the market and point out the eventualities.
3. Execution — The execution of algo trading systems ensure all the trigger points are established meeting functional and non-functional requirements that have been hard-coded in the system.
4. Monitor — relating to monitoring algo systems through various financial metrics including Sharpe Ratio, Treynor Ratio and ROI.

TRADING EXECUTION ALGORITHMS

Trading Execution Algorithms refer to the use of predictive analytics by advisors to recognize performance and take advantage of patterns that can be indiscernible to human traders for their clients.

There are 3 popular used Trading Execution Algorithms: Time Weighted Average Price (TWAP), Volume Weighted Average Price (VWAP) and Percent of Value (PoV).

• TWAP: an order will be broken into small pieces which then are executed during trading day, normally at 5-minutes intervals.
• VWAP: Split the order into smaller pieces based on average weighted volume which are estimated every 5-minutes intervals and historical trading information.
• PoV: Calculate the smaller blocks based on the percentage of participation in the market. This one could avoid excessive impact on market pricing.

With a good understanding of the most basic trade execution algorithms, you can add value to your clients and mitigate the risk of negative performance to their portfolios!

That’s all about algorithmic trading — everything you need to know. Feel free to share your thoughts with us by leaving comments below.