Automated Crypto Trading Systems: The Pros and Cons

Manual crypto trading could soon be a thing of the past. Discover what you need to know about automated trading, the pros and cons, and the potential it promises.

  1. Establishing Trading "Rules"

  2. Advantages of Automated Systems

  3. Drawbacks of Automated Systems

  4. Server-Based Automated Crypto Trading

  5. Before you Automate

  6. Conclusion

 

Trading on the markets used to be like you see in old movies. Men waving pieces of paper at each other on the floor of an exchange while others shout into telephones, one for each ear. In the current age, that kind of approach just doesn’t cut it anymore. Manual trading does still go on, but it’s now informed by all sorts of prediction algorithms, and many traders now put their faith in automated trading systems. These are sometimes referred to as algorithmic, automated, or system trading systems, and they work by letting traders set out particular rules for when to exit or enter a trade. Once these rules have been inputted the computer will execute them, on time, every time. Such is the increase in their popularity that automatic trading now accounts for between 70- 80% of all trades on U.S. stock exchanges.

Investors and traders set out rules for entry, exit, and money management and computers follow these instructions to the letter. The machine never gets cold feet about a trade. It always sticks to the strategy, and that’s one of the advantages that it has over us emotional human beings, who are often prone to making decisions based on our feelings rather than the rules.

The entry and exit rules for a trade can come from something as simple as a moving average crossover, or as complicated as a set of strategies that call for an in-depth understanding of the trading platform’s programming language.

Automated trading systems usually call for software linked to a direct access broker, and any dedicated rules need to be written in that platform's exclusive language. The TradeStation platform, for instance, relies on the EasyLanguage programming language, and NinjaTrader uses NinjaScript.

Establishing Trading "Rules"

Not all trading systems are super complicated. Some platforms come with ‘wizards’ to help users begin strategy building. They build a set of rules from a list of generally available technical indicators that guide the automatic trading. They could for instance stipulate that the system enters a long position trade as soon as the 40-day moving average crosses below the 150-day moving average on a ten-minute chart of a specific trading instrument. Users can also enter the type of order (limit or market, for example) and what will trigger the trade (such as the close of the bar or open of the next bar), or they could use the platform's standard inputs.

But a lot of traders decide to program their own custom indicators and follow their own strategies. It takes a lot more time and effort to do this compared to simply going with the platform's wizard, but it’s worth it considering the high level of flexibility that this affords. Shaping exactly the system they want can lead to greater profits. No system is perfect of course but going the extra mile at the start can get it that much closer to perfection.

With the rules in place, the computer is then ready to keep tabs on the market. It looks for opportunities to buy or sell, based on the specifications laid out in the trading strategy. It enters an appropriate trade and sets stop losses, trailing stops and profit targets according to the instructions it’s been given. In rapidly moving markets, this kind of instantaneous order entry can minimize the damage inflicted on the trader by unfavourable market shifts.

Advantages of Automated Systems

There are many reasons why a computer will do a better job of sifting the markets in search of trading opportunities than a human can:

They don’t have feelings

As we noted already, trading systems don’t succumb to human emotions, so they shield traders who are too timid to execute a planned trade or those who execute too many because they’re too confident. The computer always sticks to the plan, and it never makes a bad call due to a hangover, lack of sleep, or misplaced faith in fortune-tellers.

Backtesting

Once you’ve come up with a new set of rules for an automated crypto trading system, you can test it using market data from the past. This is the ideal proving ground because you already know what happened. The data lets you know exactly what a crypto did over a specific period, so you can see whether your potential new trading model would have made you better off or broke. You can test it again and again, tweaking parameters until you’ve got it as close to perfection as it’s possible to get before you finally let it loose with your money.

Staying Disciplined

Automated trading takes care of any discipline issues that you might have, even when the markets are volatile. When a market feels like the South Atlantic ocean during a storm, it’s easy for emotion to creep in and affect your decisions. You may be scared of taking a loss when it’s actually the best option, or you may be swayed by greed into chasing the last little bit of profit when you should ideally be getting out. Automated crypto trading ensures that everything goes according to plan, and it also removes the risk of human error.

It’s been said that every trader should plan the trade and trade the plan. A potentially profitable plan loses that potential if you ignore the trading rules that you set. It can be tempting to deviate from the plan if you see losses because losses have a way of denting our confidence badly. The urge to do something can be overwhelming, and that’s what steers us away from the plan. It only takes two or three losses in a row to convince us to skip the fourth trade, even though that would have been one that came up trumps.

Better Order Entry Speed

Computers react to market conditions faster than we can. When trade criteria are met, they act. Humans might delay by a crucial few seconds that affects the outcome of the trade. When a position is entered, all other orders are automatically generated, and that includes protective stop losses and profit targets. Markets can move fast, and it’s never pleasant to watch a trade miss a profit target or the past a stop-loss level before you’ve even had a chance to enter the orders.

More diverse trading

Automated trading systems allow you to trade many accounts and many strategies at the same time, so you can potentially spread your risk across different instruments and hedge against losing positions. A computer can do this almost instantly. A human would certainly fail to be so quick.

Pros

  • Keeps emotional trading to a minimum


  • Permits backtesting

  • Maintains trader's discipline

  • Permits numerous accounts

Cons

  • Hardware and software failures

  • Functionality must be monitored

  • Poor performance can happen

Drawbacks of Automated Systems

We’ve heard all the good stuff so now let’s look at the bad.

Hardware and software failures

Automated crypto trading looks good on paper. You spend time setting it up and you save time once you put it to work. Still, it may be sophisticated, but it can go wrong. For instance, with some trading platforms, a trade order is held on a computer rather than a server, so if the connection is interrupted to that machine then the trade won’t go through. It’s also possible for there to be a mismatch between the "theoretical trades" produced by the strategy and the part of the order entry platform that transforms them into actual trades. It’s best to be aware of shortcomings like these before you enter into automated trading, and that’s why we recommend that you undertake enough learning to be aware of the pitfalls first.

Monitoring

It would be very nice to be able to “set it and forget it”, but technology isn’t perfect, which means you can’t afford to leave it running unsupervised. Connections can be lost, power can go down, the software can crash, and quirky systems can require human interventions.

To avoid incorrect, duplicate, or missing orders, always monitor the system.

Over-Optimization

Some backtested techniques look great on paper but do terribly in a live market situation. Over-optimization is talking about excessive curve-fitting that results in an unreliable trading plan. Sure, you might refine a strategy to achieve near-perfect results on the historical data it was tested on, but traders sometimes make the mistake of assuming that a good plan should always deliver trades that are profitable or that never experience a drawdown, but live trading isn’t like that.

Avoid the Scams

Scams are everywhere, so always be suspicious of systems that seem too good to be true. Here’s what to think about:

If you’re ever asked for money up front to set up a trading account then you should be asking questions.

  1. Find out everything you can about the system. Read the terms and conditions and don’t commit until you are satisfied.

  2. Can you read any testimonials from happy users? Don’t just trust the vendor though, look on third-party sites or financial regulator sites, and even then, be a little suspicious. Reviews aren’t always unbiased.

  3. Do you get a trial period? Scam sites often won’t give you one.


Server-Based Automated Crypto Trading

You can run your automated trading systems via a server-based trading platform, and these often come with commercial strategies so you can design your own system or host an existing one on the server-based platform. You pay the vendor for the system to seek out, execute and monitor trades, with all orders sitting on the server. This often makes order entry faster and more reliable.

Before you Automate

Think about whether automation is something that you have time and energy to commit to, because it isn’t something you can just set up and leave alone. Trading systems can be very complicated, and while they do a lot of the hard work for you, you need to have the experience and understanding to comprehend what they are doing to control it. If you’re not at that stage yet, then manual trading might be a better option.

If you’re convinced that you do have the knowledge and experience, then start out with a simple system first. Once you’ve proved to yourself that you can make money and you feel comfortable with the platform, then it will be time to move on to bigger things. Take it one step at a time, and only add complexity when you have absolute confidence in your ability to manage it.

Conclusion

Automated trading has a lot to recommend it, but it shouldn’t be thought of as a substitute for carefully planned and executed trading. You have to be willing to put a lot of time and energy into understanding and testing systems before you trust them with your money. Sever-based platforms may offer the best solution to mitigating machine failures, and don’t forget that there are always scammers out there, so exercise due diligence before you commit to any platform.