Can hobby traders use algorithms to help them trade?

If you are interested in trading, you’ll know it is about buying and selling, for example stocks or cryptocurrencies. It’s also about timing your trades in order to increase your overall funds and make a profit.

With over 14m day traders around the world and many more trading on a part-time basis, there are lots of people looking to the markets to make some money.

However, to make money when trading, you have to invest time; a lot of time.

It’s about spotting patterns and identifying the opportunities, whether you are trading shares or crypto currencies. It is this time requirement that has been a key driver in the development of algorithms to help when trading.

Day trading is when someone buys and subsequently sells financial instruments like stocks, cryptocurrencies or futures within the same trading day. This, along with other forms of regular trading, used to be the sole domain of the professionals in the City and on Wall Street. But that is no longer the case.

Today, millennials make up 58% of online traders and over 75% of cryptocurrency traders - whether that is Bitcoin, Ethereum, Polkadot or any of the other, nearly 7,000 cryptocurrencies that currently exist.

Low barriers to entry and the ability to trade online make it very seductive for this age group. But can they make a profit from it?

Profit or loss?

It’s estimated that 95% of day traders lose money.

There are lots of reasons why; with under-preparation being most often cited as the main reason. People start too quickly and don’t have a strategy they stick to.

So, where do trading algorithms fit into this?

Trading with algorithms

Put very simply, a trading algorithm or strategy is a set of rules that, together, define when trades should take place. The algorithm helps a cryptocurrency trader to either buy, or sell, at the right time. This enables them either to minimise losses and take profits.

The algorithm can be tested on historical data, on different and past market conditions, giving you scenarios that it will help deliver good returns when used on the current markets.

These rules can then be executed by trading bots to make the trades at the right time.

Why consider using a trading algorithm?

There are three main reasons for using a trading algorithm:

1. Time

The time needed to analyse the available market data and spot the right moment to trade is considerable. Most traders simply don’t have this time available, so a trading algorithm can help.

2. Too much data

There is simply too much data available that needs to be analysed to make profitable trades. For example, with over 7,000 cryptocurrencies on the market, it is impossible to know everything about all of them without automated assistance.

3. It’s a steep learning curve

What I see is that most hobby investors have about one or two hours a week available to them to learn ‘how’ to trade, ‘what’ to trade and ‘when’ to trade. This simply isn’t enough. Trading algorithms are constantly learning because of their ability to consume and analyse large amounts of market data.

The Alternatives

1. Scripts

One alternative to using a trading algorithm would be to program a script. Trading scripts enable automatic trading, but they can only follow one strategy, are difficult to code and struggle to react to market changes quickly.

2. Copying the professionals

Copy trading is where professional traders allow people to copy the trades they do. They get paid to allow public access to their trading activities. If the right traders are chosen, this can be a highly successful alternative, but the fees can be very high, up to 30% of the profit.

3. Do it yourself

If you have the time - a lot - and the analytical skills, you may not need a trading algorithm and you can go back to trading manually.

How to go about using a trading algorithm

Choose a supplier

There are plenty of suppliers of algorithm software. Most are for large firms, however companies like Coinrule aim to help hobby investors, occasional investors and professional traders, to have easy access to trading algorithms. Coinrule’s customers are trading anything from $150 a month upwards, to $millions per month.

Choosing your strategy

Choosing the perfect trading strategy takes research and time. Bitcoin traders often use a long-term strategy, with trading on other cryptocurrencies being done using shorter-term strategies. However, you need to choose your own. The $1000 Bitcoin Challenge videos are a good starting point to help you decide. 

Picking your cryptocurrencies

Bitcoin is obviously the most well-known, but there are nearly 7,000 others. Keeping track of all of them will be impossible, so choices need to be made, at least initially. You can, of course, move between them in the future.

Defining your risk levels

One of the most important aspects of implementing an automated trading strategy is to prevent significant losses that will potentially compromise a trader’s capital over the long-term. Before making money, it’s important to learn how to protect your crypto portfolio.

Protecting funds is one of the most important aspects of the algorithm. So set your risk levels accordingly and ensure the algorithm is set up to protect you from losses.

Allocating a trading budget

When first starting to invest in cryptocurrencies, it is vitally important to set a budget that can be lost without real impact on your personal finances.

This initial budget should then be broken down into a daily trading budget, i.e. how much will be invested on a daily basis. The 1% Risk Rule is an often-quoted rule. If the portfolio is, for example, £100,000, no more than £1,000 is traded on any single trade. This protects your capital from big losses.

What is in-vogue at the moment? Cryptocurrencies. You’ll have seen media articles about enormous fortunes, and losses, being made by people trading on these exchanges. The low barriers to trading and it all being online can tempt people in very quickly and then they quickly realise they are losing money.

Follow the guidelines above, put an emphasis on educating yourself about trading, and then use a trading algorithm. In this way it is possible for portfolios to be protected and grown profitably over time.