Trading bots use complex mathematical formulas, often known as algorithms, to determine the best strategies for high-profit gains. In simple terms, a trading bot algorithm is a unique code that has the buy and sell signals built within.
But what are the most popular trading bot algorithms, and how do they differ? Let’s find out!
The trend-following algorithm does not predict or analyze past transactions. Instead, it analyzes the market trends and finds a favorable position. Ideally, the algorithm ensures a purchase when prices are rising and a sale when prices are decreasing.
You must have noticed that crypto trading is emotive, and traders often fear missing out (FOMO). This is especially so when influencers make certain remarks that affect buying and selling decisions. Now, the trend-following algorithm rides on the market trends and leverages them profitably.
Trading in a Range
The trading in a range algorithm works by identifying a range within which you transact over a short period. The algorithm picks a profitable range to trade. For instance, if a cryptocurrency is trading at $50 and you feel that it could rise to $65, the trading range algorithm will pick a range between $60 to $65.
Crypto exchanges trade coins at different prices. Arbitrage algorithms take advantage of the differences on various exchanges. The bot identifies where a certain coin is selling at a lower price and buys. Then, the bot sells at an exchange selling at higher prices.
Volume-Weighted Average Price
Traders use the volume-weighted average price (VWAP) as a tool to analyze market trends and later build some rules around them. You calculate VWAP by multiplying the price by volume and dividing it by the total volume.
The Volume-Weighted Average Price algorithm is mainly used by large institutions that want to trade large volumes without impacting the market price. For example, if you’re going to buy about $1 million worth of Bitcoin, you would have to split your purchase. Otherwise, buying it all at once would cause an increase in price as the market would detect a high demand.
Time Weighted Average Price
The Time Weighted Average Price (TWAP) measures the weighted average price of a cryptocurrency over a certain period. It is an order execution algorithm that splits large trade orders into equal parts instead of trading them all at once. The action of splitting ensures that there is no slippage or improper signaling that could affect the prices drastically.
For instance, if you want to buy $50,000 worth of Ethereum, you could split your transaction into buying $10,000 every hour instead of making one large transaction.
Making such transactions manually could be challenging, and that’s where the time Weighted Average Price algorithm comes in to automate the process.
Beware of Scam Bot Algorithms
In the recent past, there have been so many cases of crypto scams where scammers hack or redirect your earnings to their wallet. You must be wondering how it all happens, right?
Scammers will create cryptocurrency trading bot algorithm whose main purpose is to steal your hard-earned investment. Most of these bots come with irresistible offers, such as free-for-life deals. But, as always, when a crypto deal sounds too good to be true, it probably is a scam.
One of the most common scams going around currently is the Bitcoin Era scam bot. Despite the many debates regarding the legitimacy of this particular bot, the only algorithm programmed on this bot is one that steals money from you.
Manual crypto trading can be challenging because human intervention is always affected by emotional decision-making, rather than the strict use of logic. Besides, humans are bound to make errors or get tired. Crypto bot algorithms make it easy for crypto investors to invest when conditions are favorable to avoid making losses.
Some of the most popular trading bot algorithms include the trading in a range, arbitrage, volume weighted average price, time weighted average price, and mathematical model based algorithms. As you trade, always be wary of scam bot algorithms whose sole purpose is to steal from you.
Certified blockchain and front-end developer