How to use algorithmic trading to your advantage

How to use algorithmic trading to your advantage

It takes time to take a prominent position in a stock or short a penny stock for a nice gain. Time is money, and if you don’t have enough money to make up for lost profits from not trading as much as you want, what good does it do? Trading manually can be expensive, considering the amount of time needed to analyze charts and play however many stocks you want at one particular moment.

It’s an issue that cryptocurrency traders have been facing since the birth of Bitcoin. The average transaction fee hovers around $1 – well above even just fifty cents – meaning that any transaction which costs more than half a dollar isn’t feasible on most exchanges. That severely limits the amount a trader could make from a single trade, meaning that traders have to be very picky about where they’re putting their cash.

One solution has presented itself: Algorithmic trading. It’s a process by which a computer program acts as your hand in the market – buying and selling stocks on your behalf based on analyses of charts and other data inputs. The goal is to limit transaction fees and maximize potential gains through clever investing and intelligent risk management. Unfortunately, it’s not as simple as pressing ‘start’ on the algorithm and walking away; there’s still some analysis and manual labour that needs to go into running an automated trading bot. That said, this article should give you everything you need to know to get started.

Step One: Get a trading bot and put it to work.

You can use one of two types of bots for automated trading: those you run yourself and those that run on someone else’s server. Most exchanges don’t allow the latter option.

If you’re planning on running an algorithm over a short period – one day or less – then CryptoTrader is probably your best bet. The platform allows you, traders, to share ideas and compete against each other with their algorithms, allowing everyone involved to make a good percentage of returns over a short period. They allow you to connect your exchange accounts so that any time you make a transaction on Coinbase or Gemini, it’s also Coinigy based. Instead of just acting as an algorithmic trading platform.

Step Two: Backtesting and optimizing your algorithm.

The next step in turning your bot into something profitable is to backtest it. Take historical data for the stocks or coins that you’re planning on investing in through whatever exchanges you might use (or better yet, research new trades for this purpose) and run your algorithm against them with some idealized conditions of various market scenarios. You want to make sure it works well enough to merit putting actual money in, but not so well that you can’t justify using it to make a profit.

Step Three: Put your algorithm to the test.

Since it’s hard to predict human behaviour ideally, you need to put your bot into practice and see how it does. You’ll probably want a small amount of cash – a few hundred dollars at least – to get started with until you’re sure that your bot works, then increase from there if things go well. Once you’ve gotten up to around three or four thousand dollars, you can start thinking about scaling into larger positions.

Various factors will determine if your algorithm is doing its job correctly over time, including transaction fees and slippage. Research these terms and how to account for them in your algorithm because any features that help you reduce transaction fees or slippage will allow you to get more out of your automated trading.

Step Four: Don’t forget about maintenance!

Your algorithm might earn a profit immediately once you start using it, but if you let it run without checking back on it and making adjustments, there’s a good chance that it could go wrong somewhere along the line. It’ll need regular upkeep and tweaking to keep running smoothly and maximize profits; other traders will catch up eventually, after all. Other things like making sure your ISP doesn’t cut off access can also be important.

Keep in mind that it’s always advisable to test all your trading strategies on a demo account Forex brokerages offer clients before taking the plunge in the real markets.

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