Trading is older than many people believe. The first exchange was founded in Antwerp, Belgium, back in 1531, although there were no stocks in the modern sense of the word. Brokers and moneylenders met there to deal with business-related, governmental, and even individual debt issues, and there were no traditional shares that changed hands. The first stock exchange emerged in London in 1773, just 19 years before the New York Stock Exchange. After that, exchanges started emerging all around the world, new financial instruments formed, and only 50 years ago, in the 1970s, algorithmic trading emerged and changed the world of trading once and forever.

What is algo trading?

Algorithmic trading can be described simply as the automated execution of orders according to predetermined algorithms. These algorithms are also called trading bots, and the significance of algo trading can never be overestimated. Bot usage gives traders access to emotionless, dispassionate mechanisms that execute a certain strategy 24/7. They are fast and high-performing and can be programmed as the trader wishes — a nightmare for old-school traders, who still trade manually.

Algorithmic trading eliminates the risks of entering and exiting positions based on emotion and adheres to the strict rules of fundamental and technical analysis. It brings down the risk of panic buying and selling to zero, and machine learning in algorithmic trading offers access to even more opportunities. If used, machine learning and neural networks can help trading bots learn from their mistakes and readjust their strategy according to the rapidly changing situation on the market.

Algorithmic trading for beginners: How to start algorithmic trading

Algorithmic trading still requires traders to understand how the markets work, be able to rebalance their portfolio manually, and be able to read technical indicators themselves, so bots are not a universal solution for those who want to enter the market fast and start making high returns. Furthermore, traders need to be good at programming or at least understand how the bots work, as no algo trading bot seller will provide you with a strategy. You need to do all the adjustments yourself.

Then, a good trading terminal is needed to support the API connection. At Xena Exchange, bots can be connected through the web socket or REST API. If you want to trade using bots at Xena Exchange, first check out the API guides in the Customer Support Center. Furthermore, a good connection to the servers is necessary. For those who want to execute high-frequency trading strategies, co-location offers a significant advantage because the trader’s server is placed in the same facility or cloud as the exchange’s.

“We offer a tier-4 data center in Luxemburg to provide our clients with colocation facilities. In practice, that means that traders who use colocation will be able to trade up to 100 times faster than other users.”

Alexey Semichastnov,
CPO Xena Exchange

And — last but not least — traders need free access to quotes, preferably displayed directly in the terminal. The bot should extract only maximum information from the market, so the quotes should be taken care of in advance.

Algorithmic trading strategies and software

Basically, trading bots can be divided into two main groups:

  • bots that analyze large volumes of information but cannot open positions independently
  • fully automated bots that execute orders and analyze the market conditions

There are as many algorithmic trading strategies as there are for manual trading. The most popular include scalping and intraday strategies, which involve executing many orders within one day. For swing trading and investing, bots are not used widely, as in these cases, positions remain open for several days or even months. But bots here can still be of help when it comes to analyzing the market conditions.

Overall, algorithmic trading strategies can be divided into two groups.

  • Execution strategy involves the purchase or sale of assets in large volumes at a weighted average price as close as possible to the price of the last transaction. This significantly reduces costs associated with opening and closing positions and is mainly used by large players in financial markets, such as brokerage companies and investment funds. Private investors usually use speculative strategies.
  • Speculative strategy is a classic system for traders that aims to obtain the maximum profit based on the price differences between the purchase and sale price.

There are two possible ways to obtain algorithmic trading software – build it or buy it. Purchasing ready-made software offers quick and timely access, while building your own grants you the full flexibility to customize it to your needs. Whatever approach you choose, note that the loopholes that may exist in the software can lead to huge losses, so the equipment needs to be tested and readjusted all the time.

To eliminate possible loopholes, backtesting your bot on historical data is necessary. The Xena Pro Desktop terminal allows for strategy backtesting, the easy automation of trading strategies using C# and Visual Studio Code plugins, and built-in calculations, as well as one-click trading for synthetic instruments.

Xena Pro Desktop terminal allows for strategy backtesting

Bitcoin and cryptocurrency algorithmic trading

Algorithmic crypto trading came to the market soon after the first crypto exchanges emerged. The examples of algorithmic trading show that overall, they are more effective than manual trading strategies, so many crypto funds, market makers, and large companies invest in appropriate bot-trading software. Crypto algorithmic trading is hardly different from that on traditional markets, but as the community is generally more aware of new technologies, the speed of algo trading adoption is higher, and even individuals trade using bots.

On the crypto market, there are several solutions that offer access to bot trading on exchanges, such as Cryptohopper. Nevertheless, it’s impossible to develop a perfect trading bot that will be 100% profitable. As the cryptocurrency market is relatively young and volatile, fundamental analysis can only be applied to large coins like Bitcoin and Ethereum, whereas many other assets lack the liquidity to even perform thorough technical analysis. Traders should take this into consideration when selecting digital assets to trade.

To make a long story short, algorithmic trading is one of the most promising areas in trading to date. It is outstanding due to its high accuracy, its ability to profit from the very first day, and its speed, versatility, and scalability. Nevertheless, bot trading is pretty complex and costly to develop and maintain and leaves no place for improvisation (which is both an advantage and a drawback). The results achieved by bots in recent years consistently exceed the capabilities of even the most experienced and advanced traders, and trading manually against a bot is a pretty difficult endeavor.