The Best Algorithmic Trading Strategies for 2021

There are countless algorithmic trading strategies for crypto investors to choose from, some more lucrative, safer and simpler than others. However, before we jump in to discussing each of the major strategies, looking at important factors, such as risk exposure and revenue potential, let’s just quickly cover the basics of what crypto algorithms are, how they work and when they should be used.

What is a cryptocurrency algorithm?

Cryptocurrency algorithmic trading is the use of an automated system to monitor the crypto exchanges, analyze price movements and perform your trading on your behalf. Their primary advantage is that they offer a speed and efficiency that cannot be matched manually. Moreover, they can free you up to get on with your day, while implementing your strategies with machine precision.

However, it should be noted that a cryptocurrency algorithmic trading system is only as successful as its programming, so if the strategy, with which the software is coded is flawed then the results will be disappointing.

When Is It Better to Use Algorithmic Trading?

Crypto algorithmic trading versus human

It is better to use a trading bot when you do not have the time, the skills or the temperament to manually implement your own crypto trading strategies.

To invest successfully in the highly volatile cryptocurrency markets you need to research your chosen assets thoroughly, tracking the historic and current price across multiple exchanges around the clock, to identify trends and anticipate the future trajectory of the coins. Not only is this incredibly time intensive but also requires an in-depth understanding of the factors impacting the market and the ability to use a wide variety of fundamental and technical analysis tools.

A software program can monitor the markets 24/7, without needing a break, processing a huge amount of data from multiple sources simultaneously, and responding to market movements in milli-seconds, far faster than any human could manage.

Moreover, if you tend to react impulsively in response to market shifts, then an algorithm may be a safer option as it is not vulnerable to human emotion and will not abandon a carefully structured trading plan, acting irrationally out of greed or fear.

The most advanced programs on the market today are machine learning and AI-based algorithms. These use the latest technology to predict market shifts and implement the most appropriate strategy. Their primary advantage is that they can adapt their behavior, repeating decisions that work and rejecting those that don’t, making trades based on the most lucrative strategies. This works far better than standard systems that implement pre-programmed if/then logic, where the same response gets triggered by specific market conditions every time, even if it has proven ineffective.

What Are the Top Types of Strategies in Cryptocurrency Trading?

Top types of strategies in cryptocurrency trading in 2021

If you are trying to find the best cryptocurrency investment strategy you will need to consider the type of trader you are, the amount you want to invest and the time frame over which you hope to reach your revenue targets. You will also need to decide whether using algorithmic trading software will be the best way to implement your cryptocurrency trading strategy.

An algorithm is not a guarantee of success. A bot will generally use back-testing, a method where the strategy is tested against historic market data. This is a great way to try out an approach risk-free, but it is restricted in its efficacy, since it means the strategy is being formulated based on past conditions and is not devised for the current market reality. Even so, bots enable traders to achieve a speed of execution that allows for the use of strategies that would otherwise be impossible to implement.

Let’s now take a look at some of the most popular algorithmic trading strategies that you can expect to see being used with the greatest frequency in the year to come.

Mean Reversion

Mean reversion looks for statistical divergences from the average price of an asset. It works on the basis that the asset value will inevitably trend back to its historical average price, so any extreme deviations from that price will eventually reverse themselves. So, even Bitcoin, which has seen a consistent upward trajectory, will revert to its average pace of growth, after any major highs and lows.

The algorithm will calculate long-term averages, to execute trades based on the reasonable assumption that any substantial deviation will self-correct in time. One major indicator that is used for this type of strategy is Bollinger Bands, which determine upper and lower deviation limits from a central moving average. If one of these thresholds is hit, then clearly a reversal is on the way.

Mean reversion is also sometimes used in pairs trading, with two commonly correlated assets. When one moves sharply up or down, the other is likely to move too and the algorithm can place an order accordingly.

The danger of this type of strategy is that sometimes if there is an inherent problem with the fundamentals, such as the utility of the asset, then there may never be a reversal and the price will crash permanently, without ever bouncing back.

Momentum Trading

Momentum trading follows current trends, and it is one of those algorithmic trading strategies for which speed is of utmost importance. It is based on the theory that if a trend can already be identified in the market then it is likely to continue until the market data signals otherwise. Frequently a day trading cryptocurrency strategy, momentum trading involves buying the asset while it is rising in value and selling when it looks to have hit its peak and is about to lose momentum. It exploits market volatility, taking advantage of the opportunities provided by short- term trends. This can involve a higher degree of risk, when focused on the hours ahead, than a more long-term investment approach that doesn’t depend on the rapid hour- by-hour fluctuations of the crypto market.

Momentum trading makes use of moving averages for monitoring trends. This type of indicator looks at the average price of the asset over a given time frame to make market projections. If the trend can remain distant from the moving average line then it is considered to be strong, whereas if it is close to or crossing the line it is seen as a weak trend. Obviously, the data from the moving average holds greater weight, the longer the time period being viewed.

Crypto Arbitrage

Crypto arbitrage is becoming increasingly popular and without a doubt, will be a leading cryptocurrency investment strategy for 2021. This is because it exposes the investor to close to zero risk, as it is not vulnerable to crypto market volatility, while still offering incredible profit protential.

It involves searching for price discrepancies across exchanges. A currency can, very briefly, be available at different prices on various exchanges at the same time. A crypto arbitrage algorithm will use its exceptional speed to buy the coin on the exchange where it is cheapest and then sell it on the exchange where the price is highest, to make a profit, before the temporary price anomaly resolves itself.

Here, at ArbiSmart, our AI-based, machine learning crypto arbitrage platform is connected to 35 different exchanges, which it scans simultaneously, 24/7 to find and exploit crypto arbitrage opportunities, for returns of up to 45% per year, depending on the amount you deposit.

What Should You Look for in a Trading Algorithm?

Just as there are numerous strategies to pick from, there is an equally long list of cryptocurrency algorithms available to you. If you are wondering how to implement algorithmic trading with cryptocurrency in the safest way possible, the answer is simple. You need a software platform that is regulated, reputable and reliable. Even if you have chosen the best cryptocurrency strategy, if your account isn’t safe, none of it matters. For this reason, at ArbiSmart, we are fully FIU licensed, which obliges us to comply with the toughest EU regulations, with regard to data security, platform functionality and regular external auditing.

Not only do you need a secure home for your crypto funds, but with the world’s economic, as well as physical health remaining fragile as we enter the new year, any cryptocurrency investment strategy for 2021 needs to minimize risk and maximize revenue potential as effectively as possible.

To learn more about the cryptocurrency markets and the technologies and strategies available to investors, check out the ArbiSmart blog. Alternatively, you can check out our fully automated crypto arbitrage platform, get started, and put it to work trading on your behalf.

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