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FAQ for New Crypto Algo Traders


In this post, we've compiled helpful Q&A resources for developers interested in exploring crypto algo trading and traders with experience in trading but limited programming knowledge.

What is Algo Trading?

Algo trading involves using computer programs to automatically execute trades based on predefined rules, or algorithms. Its objective is to generate profits at a high speed and frequency. The low barriers to entry, including accessible exchange APIs, abundant free tutorials and documents, modest hardware requirements, and a 24/7 market, make algo trading in the crypto realm increasingly popular.

Advantages of Algo Trading

The primary advantage of algo trading is its ability to operate continuously, 24/7. Automated bots don’t tire, and the crypto market never closes. However, this doesn’t mean you can leave your bot unattended indefinitely. Bugs or incorrect rule setups need regular monitoring and adjustments.

Speed is another significant advantage. While crypto trading bots may not match the ultra-fast speed of stock algo trading systems, they can still capitalize on fleeting profit opportunities faster than humans.

Algo trading also offers robust backtesting capabilities. Since trading strategies are predefined, users can test them with historical data simulations before investing real money.

Importantly, computers operate without emotions, avoiding the irrational investment decisions often made by humans.

Disadvantages of Algo Trading

Algo trading isn't suitable for everyone.

One major hurdle is its technical complexity, requiring programming skills and a deep understanding of trading strategies and financial concepts. Ideally, a beginner in algo trading should have strong programming skills, trading experience, and financial knowledge.

Algo trading is also susceptible to risks like mechanical failures, system glitches, and bugs. Starting small and proceeding with caution is advisable.

Additionally, algo trading can be more expensive than manual trading. Increased trading frequency leads to higher transaction fees, and there's also the need for quality hardware, stable internet, and potentially, cloud hosting and data feeds.

Choosing Trading Pairs

Choosing cryptocurrency pairs for trading is subjective. It can involve trading favorite coins to increase holdings, observing price movements for opportunities, or even trading less favored coins for shorting. Patience, along with trial and error, is key, always keeping specific goals and strategies in mind.

Creating Your Own Bots

Developers with a strong grasp of their preferred trading strategies can consider building their own trading bots. However, this task is time-consuming and challenging, especially in a sector with unstable infrastructure. Deciding whether to build or use an existing bot requires a cost-benefit analysis.

Here are some useful resources for bot building:

Using Existing Bots

Using an existing, especially open-source, bot can be a good alternative. It saves time and serves as a customizable base.

However, there are risks, such as losing money due to incorrect settings or a lack of understanding of the bot's algorithms.

At Hummingbot, we aim to enable anyone to run a crypto market making bot with a focus on a low-risk strategy called cross-exchange market making. This approach offers a more accessible start for novice traders.

Starting Capital

The current market environment allows for a low entry barrier for new traders. Starting with as little as $100 is feasible, though transaction and withdrawal fees can significantly impact profits on smaller amounts.