Top Crypto Trading Algorithms: Best Bots for Algorithmic Trading

Last Updated: 16 October, 2023
8 min read

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Crypto algo trading or algorithmic trading has become increasingly popular strategy in the digital markets over the past few years. Algorithmic trading uses computer programs to automate the buying and selling of cryptocurrencies based on predefined strategies and market signals.

For those new to crypto algorithmic trading, this comprehensive guide aims to provide all the key information you need to understand how it works and how to get started.

What is Crypto Algo Trading?

Algorithmic trading, also known as algo trading or automated trading, utilizes advanced algorithms and trading bots to analyze market data and place trades automatically on your behalf. The core benefit is that the trading process can be automated 24/7 without requiring constant manual oversight.

The algorithms make trading decisions by monitoring various market variables and indicators such as price, volume, time, orders, news sources, and social sentiment. When certain criteria are met, the trading algorithms will automatically execute the buy and sell orders.

The main components of an algorithmic crypto trading system are:

  • Trading strategy – The strategy programming contains the specific rules that dictate when to buy and sell. Common strategies include trend following, mean reversion, arbitrage, etc.
  • Technical analysis indicators – Indicators like moving averages, RSI, MACD, bollinger bands etc. help algorithms identify trading opportunities.
  • Execution algorithms – These algorithms determine how orders should be executed to achieve optimal entry and exit prices.
  • Risk management – Stops losses, position sizing and diversification help algorithms manage risk.

The major benefits of algorithmic crypto trading are:

  • 24/7 automated trading – Algorithms can trade automatically around the clock without breaks.
  • Backtesting – Strategies can be backtested on historical data to gauge performance.
  • No emotional decisions – Algorithms stick to the strategy without emotion influencing decisions.
  • Speed and precision – Trades can be executed in microseconds to capitalize on opportunities.
  • Scalability – Automated systems can trade high volumes and frequency.
  • Diversification – Algorithms enable you to trade multiple strategies and assets simultaneously.

How Does Crypto Trading Algorithm Work?

Here is a step-by-step overview of how algorithmic crypto trading works:

  1. Develop a trading strategy – Trading algorithms are programmed based on technical indicators and predefined trading criteria that trigger buy and sell decisions. Common trading strategies include trend following, mean reversion, arbitrage etc.
  2. Backtest the strategy – The strategy is backtested against historical market data to determine its viability and expected performance. Parameters can be refined during backtesting.
  3. Optimize strategy parameters – The inputs are optimized by tweaking variables to improve performance on historical data.
  4. Implement the trading strategy – The strategy is integrated into a live trading platform connected to crypto exchanges via APIs.
  5. Initiate automated trading – The algorithm monitors real-time market data 24/7 and executes trades based on the strategy rules and indicators.
  6. Monitor performance – Key metrics are tracked to monitor the effectiveness of the automated trading strategy versus benchmarks.
  7. Maintain and upgrade – The algorithm is periodically reassessed and upgraded to react to evolving market conditions.

complex digital algoritms illustration

Key Steps for Cryptocurrency Algorithmic Trading In-Depth

Now let’s explore some of the key steps in more detail:

Developing a Trading Strategy

The first step is to develop the trading strategy that will drive automated buy and sell decisions. Some examples of common algorithmic trading strategies are:

  • Trend following – Buys in an uptrend, sells in a downtrend based on momentum indicators like moving averages. Aims to capitalize on sustained directional price movements.
  • Mean reversion – Involves buying assets that have dropped to a perceived low price and selling after subsequent recovery. Assumes prices will revert to a longer term mean.
  • Arbitrage – Seeks to capitalize on price differentials for the same asset on different exchanges or platforms. Buys the asset on the exchange where price is lower and sells where it is higher.
  • Index funds – Holds a basket of assets proportional to a benchmark index. Rebalances periodically to maintain proper weightings. Provides broad market exposure.
  • Math-based – Mathematical models are used to identify when assets are overbought or oversold based on historical data patterns.

The strategy includes specific rules for entries, exits and position sizing based on indicators and market conditions. Coding languages like Python, R, C++ etc. are used to program the automated trading systems.

Backtesting the Strategy

Once a strategy is developed, it needs to be thoroughly backtested before deployment. Backtesting involves applying the strategy over historical price data to simulate how it would have performed. Several years of historical data is preferable when backtesting.

Key aspects evaluated during backtesting include:

  • Profitability – Is the strategy consistently profitable based on parameters like return on investment, Sharpe ratio etc.?
  • Risk metrics – How much drawdown and volatility does the strategy experience? Are losses within acceptable limits?
  • Trade frequency – Does overtrading occur? Are commissions and fees excessive?
  • Market efficiency – Does the strategy still work after accounting for slippage, spread costs, market impact etc?

Multiple iterations of backtesting are done to optimize the inputs and maximize performance. The end goal is to develop a strategy that is consistently profitable on historical data while keeping risk controlled.

Optimizing Strategy Parameters

Parameter optimization is a key part of the strategy development process. The inputs and settings governing the trading rules need to be fine-tuned to enhance performance.

Some examples of parameters that can be optimized are:

  • Technical indicators – The type of indicators used, their settings (e.g. moving average periods), and how they are combined.
  • Entry/exit logic – The specific price levels, indicator values, or market conditions that trigger entries and exits.
  • Position sizing – The money management rules determining how much capital to allocate to each trade.
  • Frequency limits – The minimum intervals between trades and maximum number of daily trades.

Optimizing across these parameters requires running iterative backtests to find the ideal combinations. Machine learning techniques like Bayesian optimization can automate and expedite the parameter tuning process.

The goal is to find the optimal balance of high returns and controlled risk for the market being traded. Over-optimization can lead to overfitting, so out-of-sample testing is critical.

Implementing the Trading Strategy

Once a thoroughly backtested strategy with optimized parameters has been developed, it’s ready to be implemented for live trading.

There are a few options for deploying algorithmic trading strategies:

  • Self-coding – Develop your own proprietary automated trading system and connect it directly to exchanges via APIs. Requires coding expertise.
  • Trading platforms – Use crypto bot trading platforms that allow coding and integrating custom strategies. Examples include 3Commas and Cryptohopper.
  • Automated services – Some firms offer fully hosted solutions to deploy automated trading. Less coding required.

The algorithmic trading system needs to be integrated with live market data feeds and have connectivity to execute orders directly on crypto exchanges via APIs.

Initiating Automated Trading

Getting this trading system operational, it’s time to deploy it live. The algorithms will begin analyzing real-time market data 24/7 and placing buy and sell orders based on the coded strategy rules and indicators.

To start, it’s advisable to begin with small position sizes and trading frequency limits to minimize initial risk. Many traders will run their algorithms in a simulated “paper trading” environment before committing real capital.

Assuming initial results are positive, the position sizes and limits can be gradually increased over time. It’s crucial to monitor the process frequently and be prepared to stop trading if issues emerge.

Monitoring Performance

Once live the trading begins, it’s essential to monitor the performance and risk metrics closely. Some key data to track includes:

  • Returns – Realized and unrealized gains/losses, total portfolio return.
  • Volatility – Standard deviation of returns, drawdowns.
  • Sharpe ratio – Return relative to risk taken.
  • Market impact – Slippage, effective spread paid.
  • Trade accuracy – Percentage of profitable vs unprofitable trades.
  • Operational issues – System failures, connectivity problems.

By continuously tracking performance versus benchmarks, traders can determine if their algorithms are operating as expected. Underperformance may require halting trading and reevaluating the strategy logic and parameters.

How to Choose an Algorithmic Crypto Trading Bot

Selecting the right algorithmic trading platform is crucial for successfully deploying automated strategies. Here are key factors to consider when choosing a platform:

  • Backtesting capabilities – Robust options for strategy development and backtesting using historical data.
  • Cloud-based – Accessible via any device with an internet connection. Reduces hardware dependencies.
  • Strategy coding – Support for writing complex code in Python, R, C++ etc.
  • Pre-built strategies – Availability of ready-made strategies for those without coding expertise.
  • Technical indicators – Wide range of indicators and analytical tools to utilize in strategy programming.
  • Auto-execution – Capable of automated order entry for live trading without manual intervention.
  • Exchange integration – Connectivity to major crypto exchanges such as Binance, Coinbase Pro, Kraken via API.
  • Portfolio management – Tools for tracking P&L, orders, inventory, etc. across multiple exchanges in one dashboard.
  • Notifications – Alert options for order fills, errors, or other trading events.
  • Pricing – Cost structure favorable for your anticipated trading activity. Check for hidden fees.
  • Security – Uses industry best practices for data protection and cybersecurity.
  • Trustworthiness – Established platform with a reputable history in the space.

Some of the most popular algorithmic cryptocurrency trading platforms that you can check out are:

It’s wise to thoroughly compare multiple platforms via free trials to determine the best option based on your specific needs as an algorithmic trader.

Common Algorithmic Trading Strategies

While algorithmic trading strategies can get extremely sophisticated, here is an overview of some more straightforward and commonly used strategies:

Strategy Description
Trend following Uses indicators like moving averages to assess momentum and establishes long or short positions in the direction of the trend. Closes trades when the trend changes direction according to the indicator signals.
Mean reversion Involves opening long positions when an asset has dropped below its historical average price, expecting it to revert back up. Short positions are taken when the asset moves far above average price expecting it to fall back down.
Momentum Buys assets that have had an increase in trading volume or price strength recently and sells based on weakness. Can involve continuations or fades of crossovers between fast and slow moving averages.
Index tracking Holds a portfolio allocation that matches a benchmark index like the total crypto market cap. Periodic rebalancing is done when weightings deviate.
Arbitrage Seeks to exploit price discrepancies between correlated assets on different exchanges by buying on one exchange and shorting or selling simultaneously on another.
Mathematical models Formulas and patterns identified via statistical analysis of historical time series data are used to determine probabilities of future price movements and inform trading decisions.

These provide a starting point for crafting an algorithmic trading strategy. More advanced traders might incorporate techniques like machine learning, market making, high-frequency trading, and more.

The key is rigorously backtesting the strategy and fine-tuning it for your desired market. You want reliable performance metrics that give confidence in the process before going live.

Tips for Better Success with Algorithmic Trading:

Here are some best practices to follow for improving your likelihood of success with algo crypto trading:

  • Start small – Begin by running strategies on paper or with tiny position sizes. Gradually increase your scale as positive results build confidence.
  • Manage risk – Use proper stop losses, diversify across many assets, and size positions appropriately. Don’t risk more than 1-2% of capital per trade.
  • Monitor regularly – Watch for deteriorating performance, changes in market behavior or and issues with the exchanges. Be ready to halt trading if necessary.
  • Have a coding expert – Work with a top programmer to code your algorithms properly. Don’t cut corners that could lead to costly mistakes.
  • Use multiple exchanges – Deploy capital across several exchanges for tighter spreads, redundancy, and arbitrage opportunities.
  • Stay objective – Don’t override your system based on emotions. Stick to the parameters of your backtesting even during drawdowns.
  • Upgrade as needed – Be prepared to periodically enhance and adapt to evolving market dynamics.
  • Maintain good cybersecurity – Take precautions like 2FA, whitelisting, antivirus software, separate trading and wallet addresses etc. to avoid being hacked.
  • Keep learning – Consume content and join communities to keep improving your algorithm development abilities as methods progress.

The keys are proper strategy backtesting, managing risks, coding without errors, and objectively running your algorithms over the long-term. Patience and discipline is required even during inevitable drawdowns.

Getting Started Tips

For those looking to dip their toes into algo crypto trading, here are some practical tips to begin:

  • Learn to code – Start learning languages like Python so you can program basic trading strategies. CodeAcademy is a good starting point.
  • Use a template – Look for pre-made templates you can tweak versus coding from scratch. QuantConnect has a library of starter algorithms.
  • Try a visual editor – Platforms like Cryptohopper use visual editors so you can create strategies without traditional coding.
  • Start reading – Immerse yourself in algorithmic trading content to deeply understand the core concepts. Books by Ernest Chan are highly regarded.
  • Join a community – Participate in forums like algoTrading101 on Reddit to exchange ideas with experienced practitioners.
  • Use paper trading – Virtually trade and backtest strategies in a simulated environment before risking real capital. Many platforms support this.

The path to becoming a skilled algo trader takes time, but getting started using these tips can accelerate your progress considerably.

To Wrap it Up

Algorithmic trading has exploded in the crypto markets due to its advantages of automation, speed, diversification and backtestability. While getting into algo trading has a learning curve, this guide provided the key steps for strategizing, backtesting, implementing and running systems for those new to the field.

But before you go…

This is just one of the many crypto trading strategies out there.

Wanna unlock more battle-tested strategies? Swing by:

Gianluca Lombardi

Gianluca is the editor-in-chief of this site. A finance graduate, he is an active trader who has tested all trading platforms and knows all their secrets. Technology is his passion; he spends much of his free time in the metaverse. Gianluca loves learning new things, researching, discussing and writing about technology, especially when it comes to cryptocurrency and blockchain technology.