What is algo trading and how it works

How to maximize the efficiency of your crypto day trading strategies? Master algotrading – a surefire way to save time and automate processes. How does it work and is it worth the money? This guide is here to introduce to you the basics of algo trading platforms. 

What is algorithmic trading? 

This approach means that all deals are made automatically by a robot, a special program that helps to trade financial assets, including cryptocurrency. It works according to pre-set algo strategies and can take off burden from the user’s shoulders. 

The required indicators can be set up manually or be built into the algorithm. There are several types of trading bots. One of the simplest day trading techniques is to buy cryptocurrency when the price for it decreases, and sell it when the value continues to rise. This option is used by many traders, especially beginners.

Advanced traders create their own algorithms and set those up in robots – the software starts taking decisions using a set of variables. Such bots will place an order only if the market data matches the parameters set by the owner).

For example, they can study a graph of the price of assets over a particular period. If the cryptocurrency falls by not more than 10%, the robot will buy it. If the fall exceeds 25%, the bot will refuse to open a position. 

Types of robots

There are two main types of robots: 

  • Trading robots designed to work within a single site. Their algorithmic trading strategies boil down to tracking the difference between buying cryptocurrency and reselling it.
  • Arbitration bots. These programs perform trades on multiple exchanges and make money on the price between platforms. For example, such bot will buy crypto on one platform, and sell on another, where it is more expensive. 

Each trader chooses an assistant according to experience and budget. Both trading and arbitrage robots can be beneficial if used correctly. The best algo trading software has a wide range of settings that can be customized.

The mechanism behind crypto trading robots

How does algotrading work? The main element of the program – a trading algorithm – is responsible for the successful operation of the program. This is a set of parameters that determine which decision to make. In the process of transactions, a bot analyzes the cryptocurrency platform. 

Algorithmic trading software is sold with ready-made settings, though they might be customized manually. But while a seasoned trader professional can profit from this, the abundance of parameters will only confuse beginners. 

If you are not a seasoned trader yet, it’s better to . Some of them are compiled specifically for currency pairs, others are actively used in stock markets.

Can I be banned for algotrading?

On some platforms, the use of algo trading strategies will become a violation and a broker ban will follow. Trading robots perform a huge number of operations, but each transaction brings a commission to the counterparty, i.e. brokers. Some websites even encourage such an approach.

In fact, algotrading is allowed on most sites. If in doubt, you can contact the technical support of the exchange with this question. 

Where to find a robot for trading cryptocurrency? 

Another common question is how to find an option for maximizing your earnings. There are three algo trading options: 

  1. Making up a program on your own. To do this, you need to be an advanced user. 
  2. Purchase a bot. This method is suitable for both new and experienced traders
  3. Use free algo trading software. Yes, some algotrading solutions are absolutely free, but their settings are limited. Use of free bots is recommended for starters: they can learn the basics of day trading strategies, see how bots work, how to customize settings and so on. 

Advantages of algotrading 

Like any strategy in trading, bots are not a magic bullet – they work well in the right hands. It’s crucial to weigh all pros and cons of bots before coming up with your best algorithmic trading strategies. 

Let’s start with advantages: 

  • The ability to enjoy more free time. When newbies register on cryptocurrency exchanges, they get embarrassed by the need to analyze the market at least 7-10 hours a day. It takes a lot of effort to get a profit. If you have a robot that runs 24/7, you can devote time to other activities. 
  • Cryptobots can trade on multiple exchanges at the same time. A person cannot do this, while bots are capable of processing tons of info. Another viable option is to purchase multiple bots and increase your income. 
  • Speed of work. From this standpoint, a live algotrader is always inferior to an automatic advisor. The price of cryptocurrencies change instantly, and it takes a lot of time to calculate all the proportions and make a decision. Robots work faster, and a deal concluded on time can bring substantial profits. 
  • Robots trade strictly according to the plan. For beginners, it takes months to start reaping their first earnings. When you’ve got a cryptobot assisting with analysis and deals, you can reduce risks and trade profitably. 
  • Bots rarely make mistakes. Being a product of human thought, bots are not fully immune to errors. But from the technical point of view, their work is faultless, so the risk of missing something or miscalculating is close to zero.
  • No emotions. A huge part of traders, especially newbies, make one and the same mistake: they let fear and impatience take over. It is especially true when people invest their last penny. Cryptocurrency algorithmic trading bot does not get tired and does not feel doubts. 

Disadvantages of algotrading 

  • Absence of flexibility. A robot trades according to a given set of variables, and any non-standard situation can disrupt the efficiency of intraday algorithmic trading strategies. It’s a serious problem for digital currencies since they are prone to high volatility. When it comes to short-term trading, a user can easily make riches with the help of a cryptobot. If you take a bit longer time span, for instance, a day, a live trader has a much higher chance of concluding a profitable deal. 
  • Market analysis capabilities are limited. A professional trader will be able to quickly analyze the market situation and make an accurate forecast. The bot will trade in the evening the same way it traded in the morning, even if the situation on the market has changed dramatically during the day. 
  • Broker commission for each trade. Aside from algo trading software price, traders should remember about broker’s fees: they are charged regardless of whether you made a profit or not. If you incorrectly configure the bot parameters, the commission can be significant. However, the number of deals can be customized within two clicks.

What is better – manual trading or algo trading software?

Assessment Factors Manual tradingAlgotrading
Number of trading instruments The trader is able to keep track of a maximum of 4-6 instruments. With a larger number of them, the quality of trade drops sharply.The number of trading instruments in the best algorithmic trading software is not limited. New markets, asset types, etc. can be added.
Speed of transaction processing A trader is unable to send hundreds of orders per second, quickly perform complex calculations and simultaneously create an optimal stock trading algorithm. Because of this, good profit opportunities can be lost.The robot copes with tasks instantly. It performs analysis much faster than a person and reacts to price fluctuations instantly. 
Trading modeA trader cannot monitor the market around the clock. Therefore, situations are inevitable when he will miss out on profitable deals.The automated trading algorithm works 24/7. It doesn’t need rest.
Making changes to a strategy If a trader sees a mistake in his algorithmic strategies, he can correct it immediately.If there is an error in the trading algorithm, the program will not change its actions even when all transactions are unprofitable. In this case, a reconfiguration is needed.
Trading during important newsA live trader is able to interpret news and make corresponding decisions or changes in his strategy.Robots are not programmed to react to news, sometimes the impact of fresh information on their efficiency can be disruptive. 
Influence of emotions on tradingTraders are prone to the influence of emotions – all to a different extent. That impacts the efficiency of trading. Algo software is free from the influence of emotions, it does not give up to fear, panic or unreasonable euphoria.

Thus, despite some disadvantages, algorithmic trading is a great way to make trading more efficient, more profitable, save a lot of time and outperform manual traders. Algo trading significantly expands the trader’s capabilities in choosing the number of traded instruments, the speed of analysis and execution of transactions.

And the shortcomings can be compensated for by carefully monitoring the market and news, analyzing the obtained trading results and making timely changes to your simple day trading strategy and robot settings. But since the same must be done in manual trading, this does not create any additional burden for the trader.


It is important to understand that algorithmic trading does not free the trader from the need to study the market, work on improving the strategy and gain new knowledge. All this is imperative to properly configure the robot’s stock market algorithms and evaluate its performance.

The robot only does what a person puts into it. If the trader does not have the necessary knowledge and experience, any program will bring losses – it’s just a matter of time and market changes. That’s why manual changes and machine learning for algorithmic trading are so important.
The best algo trading strategy is to combine manual and automated trading – it allows to significantly increase profits while spending much less time on trading than in the manual mode.

Amar Rupinder Gupta

Indian analyst in the field of trading in the forks and binary options markets. Writing about the successes and failures of banks, investment companies, and major traders. Stories about fraudulent schemes in investing and market news. Lessons in investing and portfolio management. Graduated from ICFAI University.

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