What Is Algorithm Trading And Why Isn’t Everybody Using It?

News, Opinion | May 13, 2019 By:

The term “algorithm trading” may be a bit new even for veteran traders. Trading bots is probably a bit more familiar. Nearly every trader has heard of it, and maybe some of them have even tried. The software is usually used to translate a strategy into a code so that it can be executed within milliseconds, something a human cannot do. It is extremely effective in a high volatility market, which begs the question. If it’s so effective then why isn’t everybody using it? Well, there are a few disadvantages.

Algo trading requires skill

Moving away from the fact that the algorithm itself needs development, the act itself is pretty hard to. For example, in order to have at least some basis of creating the program, an individual must possess some existing knowledge about the crypto market. They need to have enough knowledge of various strategies that revolve around High-Frequency Trading. Call it scalping or day trading, it’s basically opening and closing your positions at a very fast rate.

Going back to the development argument. Algo trading can only be done by people who know how to code. Translating a strategy into Python or Java or any other language requires knowledge of that programming language. Plus it’s not as easy as just writing:

If (profit = ‘true”) {

Close_position =’true”;

};

No, it requires multiple adjustments according to the platform’s spread and daily traded volume. Due to people not knowing this, many of them fall for scams designed by knowledgable, but opportunistic traders.

Don’t trust 1-option bot providers

When the strategy was gaining a lot of popularity, developers started making these programmes and selling them to traders. Thanks to a pre-determined platform, most of these traders were able to succeed, but just a small change in the trading features of a platform turned all of the programmes obsolete.

You should also note that there are companies that started to “clone” the simplistic way these robots work, and started to portray scams with unregulated brokers. For example, as seen on the German portal Kryptoszene, the crypto trading robot Cryptosoft has showed a lot of promises to their users, but wound up being one of the most notorious scams in Germany.

Why is Algo trading so effective with cryptos?

As already mentioned, the nature of High-Frequency Trades depends on the volatility of the market. And there is no market more volatile than the crypto market. Because of this, it’s very hard for humans to participate in a quick fluctuation immediately, usually, after seeing one happen, it takes them about a second to react. The code itself is able to react about 10 times faster, which guarantees much more profit.

Imagine looking at a lifeline of a person, that drank 10 cups of coffee. You’d be able to predict the process, but it would be very hard to time it precisely every time. An algorithm, however, would have an imprinted command to buy and sell at a pre-determined price point. It helps catch all of the nano-spikes and falls.

Why isn’t everybody using it then?

With Algo trading being so effective it’s hard to imagine why everybody isn’t using it. Well, that’s the point. Not everybody can use it. Every trader has a different strategy, a different approach to their trades, which needs to be translated into code. Unfortunately, not every person knows how to code, therefore it isn’t universally accessible.

Yes, you can have somebody else do it for you, but it’s important to note that the market has trends, and they tend to change quite often. Due to those changes, it’s impossible to retain 1 strategy and expect it to work every time.

Furthermore, not every platform supports this type of trading. Most crypto exchanges do indeed have tight spreads, but they’re not tight enough to use an algorithm effectively. In fact, some exchanges have such a large spread that it may take hours to reach a profitable position.

Overall, there are a lot of things that need to be in perfect sync, for the trading strategy to work. The trader needs to know how to code, they also have to trade on a platform that has extremely tight spreads, and they should also have vast knowledge about the market to form profitable strategies. Overall, there are very few people trading on the market, with these set of skills.