In our last article on the subject of Bitcoin trading assisted by a trading “bot”, we had the opportunity to review the evolution of different trading strategies, from classic and very human strategies in the finance sector to strategies managed in full autonomy by crypto-traders robots which prove most of the time much more efficient than a trader in flesh and blood. Let’s focus today on better understanding the different types of strategies available to you when it comes to algorithmic trading.
Warning : This special edition of the Trading Tribune is presented to you in partnership with the company NaPoleonX. Crypto investments are risky by nature, do your own research, and invest only within your financial capacity. This article does not constitute an investment invitation.
What does the notion of algorithmic trading contain?
Before fully entering the subject of trading strategies based on algorithms, it is necessary to take stock of what is meant when we talk about algorithmic trading. Indeed, the term can seem quite complex and potentially put off some. It is therefore important to demystify it to reveal the bot trader that lies dormant in you.
Algorithmic trading is a type of trading that is not not operated by a human on the phone or behind his computer screen as we are presented in the famous “Wolf of Wall Street”. No, this type of trading we are going to talk about is computer driven which is based on one or more algorithms, hence the term algorithmic trading.
This computer-based automated trading has for several years now demonstrated clear advantages over “old-fashioned” trading. First the robot trader never stops, it is present 24/7 in the markets, always ready to analyze prices and place a buy or sell order any time of the day or night. The robot trader therefore does not take a vacation or a coffee break, beyond that and even more important, the robot is not endowed with the slightest emotions that could cause it to deviate from its initial roadmap.
While traditional financial markets sometimes have showed some reluctance to allow algorithmic trading strategies to develop, the Bitcoin and cryptocurrency market, characterized by prices open 24/7 and not having the same level of institutionalization as traditional financial markets thus offer the perfect playground to profit from a bot trading strategy.
You will understand, algorithmic trading aims to take advantage of the analysis and calculation capacities as well as the speed of reaction of a computer compared to a trader who would be human. The main strategies that we will detail in the rest of this article are as follows:
- “Momentum Trading”,
- “Mean Reversion”,
- “Machine Learning”.
Behind these Anglo-Saxon titles hide different kinds of trading bot settings which, once you have understood them, will allow you to optimize your approach to algorithmic trading.
The “Momentum Trading” strategy or how to have a bot that follows the trends identified in the markets
The so-called strategy of “Momentum Trading” intended to take advantage of a clearly identified trend in the market over a given period. This strategy therefore assumes that when a trend, whether upward or downward in the market, is there to stay, at least until the moment when it switches from an upward trend to a downward trend. the decrease or vice versa.
Concretely, this trading strategy is based on a bot that will analyze market trends and which goes, depending on the settings made, maximize profits by buying at low points in the price and then selling once a certain percentage of profit has been reached. This strategy is therefore perfect for avoiding trading influenced by emotions that sometimes lead humans to want to sell at the top of the trend, which most of the time leads to missing the tipping point and thus not not make a profit. On the contrary, the bot will try to maximize profits according to the percentage of expected profit. by its holder and multiply positive trades by taking advantage of a trend that can last. Of course, bot trading does not guarantee 100% profitability but rather allows you to put the odds in your favor.
An important indicator to consider in order to identify trends in the market is the indicator of “Moving Average” this indicator consists of drawing a line representing the average price of an asset or a cryptocurrency in this case over a period of time. Period that can vary depending on the periodicity of the trend you want to observe: trend by hour, week, month etc … We can thus observe an upward trend when we observe that the price is found above the moving average bar or lower in the opposite case.
If this so-called strategy “Momentum Trading” can be very interesting when you are in the presence of assets that show trends in the medium or long term, assets that are too volatile with prices that oscillate too quickly between an upward and downward trend can make the latter ineffective.
The “Mean Reversion” strategy, another approach for bot trading based on anticipating a return to the average price
This other strategy deployable through an algorithm is based on the principle that in a majority of situations, prices almost always end in revert to the average price of the asset. Traders who apply this strategy therefore admit that variations that are too large or too small compared to the average evolution of the price of an asset is the simple result of a snowball effect on the markets. Markets that will eventually rebalance around the historical average for the asset in question.
If we take the example of Bitcoin, even if the latter has experienced very significant upward variations since its creation, over a given period in hours, weeks or months, the price undergoes a succession of upward and downward movements around a line of average price. It is this reversion to the mean that will benefit the so-called “Mean Reversion” strategies.
An important indicator on which the “Mean Reversion” are the bollinger bands, they define high and low limits framing the average price of an asset or “Moving Average”. Once the price reaches these limit points, the probability that the price will revert to the mean are significant, the trading bot thus configured can therefore anticipate future price fluctuations once these Bollinger bands are reached.
Another form of strategy in the “Mean Reversion” category is what we call the “Pair Trading”, this strategy consists of setting up your bot saccording to variations in key assets in a market. For example, by observing historical variations in the price of cryptocurrency, it appears that when the course of Bitcoin and of Ether increase significantly, this creates a ripple effect across the cryptocurrency market. Bots that detect price increase signals on Bitcoin and Ethereum can then anticipate buy and sell orders on other cryptocurrencies on the market.
We can never remember it enough, as in any trading strategy, profits are not guaranteed and any strategy presents risks even if the configuration of an algorithm makes it possible to minimize part of it. By opting for the “Mean Reversion Trading” the risk is that your bot does not anticipate fundamental changes in the market such as an economic crisis that would upset all the indicators on which you have set your algorithm.
Machine Learning based bot trading strategies: take advantage of a bot that learns on its own to maximize profits!
As mentioned in our last article concerning the artificial intelligence revolution in the trading industry, advances in AI are now huge. It is therefore possible to take advantage of machine learning algorithms to develop an optimized trading strategy. This is notably possible thanks to advances in algorithms in natural language processing and analysis.
So your bot with algorithm of integrated machine learning is now able to scan millions of news items and newspaper articles on the internet to better anticipate trends in cryptocurrency prices.
These technological advances therefore make it possible to beyond “IF, THEN” type IT logic. Concretely, the algorithms are able to autonomously change the setting of the trading strategy according to the data they are constantly analyzing. This is really a big step forward for algorithmic trading in the sense that human intervention is hardly needed at any time.
A particularly popular strategy that involves technology like Machine learning is called “Naive Bayes”. With this strategy the bots analyze historical market data to anticipate future price variations. For example, a Machine Learning algorithm can observe that in 70% of cases the price of Bitcoin returns to the green after having made 3 consecutive days of decline. The trading bot will then be able to place a buy order accordingly to take advantage of the coming price rise.
How to access these algorithmic trading strategies?
Now that we see it a little more clearly in the different algorithmic trading strategies available to us and which are already implemented by many traders in the cryptocurrency market, the question is how to use them to grow your own cryptocurrency portfolio?
French society Napoleon Group, specializing incrypto-asset investments developed an offer to meet your needs in this area. They thus created the company NapBots, a solution that we had the opportunity to present to you in detail in a previous article.
NapBots aims to democratize access to trading bots and strategies that involve these artificial intelligence technologies. So whether you are an amateur or more experienced, you can take advantage of the bot trading strategies developed by NapBots and thus grow your portfolio. Several offers are available, you can discover them here.
In addition, you can first go judge for yourself the competitiveness of the strategies deployed by Napbots which allows you to watch in real time the performance of the various trading bots present on the Napbots platform. Most of the trading bots on the platform develop trading strategies “Momentum Trading”, but you will also find some strategies of the type “Mean Reversion”. Strategies involving algorithms Machine Learning will also be deployed very soon.
So you can see for yourself that most Napbots show 3-digit performance over the year. If you are interested in setting up a turnkey algorithmic trading strategy or even want to set up your own Crypto trading bot, we strongly recommend that you take a look at their site.
Guillaume has been passionate about Blockchain technologies and cryptocurrencies for several years now. He strongly believes in mass adoption of these in the years to come. Eager for crisp news and always on the lookout for the latest trends in the cryptocurrency market, he takes pleasure in sharing all their secrets with you!