Best High-Frequency Trading Strategies that Work in the Crypto Market by@yellowdefi

Best High-Frequency Trading Strategies that Work in the Crypto Market

image
Yellow, Inc HackerNoon profile picture

Yellow, Inc

Yellow is a new generation Layer-3 hybrid crypto exchange platform combining the best features of CEX and DEX systems

Isn't it frustrating to keep making huge losses while everyone else seems to be making a killing from Cryptocurrency? 

Since its inception and particularly this year, cryptocurrency has given rise to a new breed of millionaires. I'm talking about people who slept with crypto investments worth a few thousand and woke up to returns worth millions.

image

While most of these people are long-term investors, few are consistent and strategic short-term traders. You are probably reading this because you want to be the next crypto millionaire and can utilize any available strategies. High-frequency trading might be exactly what you are looking for. 

High-Frequency Trading is one of those investment trading strategies that promise an edge over the rest. In the following read, you are going to understand the ins and outs of high-frequency trading along with some of the best strategies to maximize your returns. 

Understanding High-Frequency Trading (HFT) in crypto

This type of trading is most common among institutional investors who are referred to as High-Frequency Trading firms. 

High-Frequency Trading platforms are reliant on data access and the ultra-fast speed of computer software. 

If you are completely new to crypto, it is best to stick to manual trading first and learn the game's tricks. Start with simple crypto day trading and then eventually work your way up to High-Frequency Trading.

Definition 

As the name suggests, High-Frequency Trading is all about speed. Using various trading algorithms, it is a purely electronic form of trading that executes trades at extremely high speeds at a volume-weighted average price. The trader utilizes these algorithms to maximize opportunities that the naked eye would typically miss. 

An algorithm is simply a powerful computer program that transacts many orders within a split of a second. 

The algorithms in High-Frequency Trading analyze various exchanges simultaneously, thus identifying the slightest price changes and discrepancies between similar assets across several exchanges. HFT platforms also hold the ability to automatically open and close several positions in a matter of seconds. 

For years, High-Frequency Trading was restricted to traditional markets like forex and stocks. However, due to its impressive features, it has been able to gain traction within the crypto space over time. 

HFT allows high-frequency traders to conduct several trades per second, which is the main reason behind its increasing popularity within the crypto sphere. Typically, the market favors traders with faster execution speeds that enable automated trading than those with slower execution speeds.  

Characteristics of High-Frequency Trading 

Its algorithms make pre-defined trading decisions.

High-Frequency Trading is common among institutional investors and market makers.

It is better suited for experienced traders with a comprehensive understanding of the market.

It utilizes real-time data feed through API integrations to automate the trading process.

It implies automated trading, which means that the algorithms directly access the market and don't require human intervention.

High-speed order execution, High-Frequency Trading is characterized by a higher number of orders, high equity trading volume, and rapid order cancellations. High-Frequency Trading is characterized by low latency execution. 

How does High-Frequency Trading operate? 

As one would expect, there is a lot of automation involved in High-Frequency trading. Therefore, understanding how High-Frequency Trading operates is more about how the computers are programmed to conduct these trades. 

As already explained, an algorithm is simply a powerful computer program that transacts many orders within a split of a second. The computer that carries out High-Frequency Trading is programmed to host sophisticated algorithms to conduct instantaneous cryptocurrency analysis across several exchanges or trading platforms. 

The said algorithms are designed by trading professionals to detect trends and other trading triggers that would not be obvious to the eye. Based on their instantaneous analyses, the programs automatically open several positions within a fraction of a second. The goal is to benefit from emerging market trends before anyone else. 

High-Frequency Trading in Crypto

The adoption of High-Frequency Trading in the Crypto space was inevitable. It first started with major institutional investors, but lately, it has trickled down to individual traders. Thanks to all the different crypto trading bots available to both individual and group investors, HFT strategies in the Crypto world are exceptional

While High-Frequency Trading is relevant to Cryptocurrency trading, it does not apply to everyone. The crypto market is extremely volatile and risky; therefore, High-Frequency Trading is better suited for experienced traders. 

Before you decide whether High-Frequency Trading is a good suit for you, you need to understand the merits and demerits involved. 

Merits of High-Frequency Trading Strategy

Liquidity – It is an incredible way to add value to the market liquidity, which results in the overall stability of the financial industry.

Low volatility – High-Frequency Trading could potentially protect the stock market from too much volatility by reducing the bid-ask spread and stable prices.

Automation and high transaction speeds – thanks to the sophisticated infrastructure, High-Frequency Trading maximizes small spreads and incentives.

Elimination of errors – High-Frequency Trading utilizes complex mathematical processes to analyze the market, thus eliminating human errors caused by emotions and fear. 

Demerits of High-Frequency Trading Strategy

Uninformed financial decisions – Large block trades are conducted in milliseconds without much thought being put into them.

More profitable for experts and institutional investors – Novice retail traders will never benefit from High-Frequency Trading, as much as experienced high-frequency traders will.

High risk – Compared to traditional trading, High-Frequency Trading is more predisposed to risk. Retail traders are still prone to losses, and the profit margins can be quite small. 

Technical hitches – High-frequency traders often run into faulty algorithms and even glitches when dealing with a particular stock.

Illegal exploitation – Scams and manipulative High-Frequency Trading algorithms that can sway the market and hurt retail investors are quite common, which is not only immoral but also illegal. 

Most Remarkable High-Frequency Trading Strategies (HFT Strategies) for the Cryptocurrency market

It is critical to note that the High-Frequency Trading strategy is not limited to the following list.

There are so many other diverse trading strategies that apply both to traditional trading and High-Frequency Trading. You need to understand that High-Frequency Trading and its related aspects are not trading strategies in themselves but rather a pathway to trading strategies. 

Here are a few popular trading strategies that could revolutionize your High-Frequency Trading experience in the financial markets

Market making

Market making is one of the most time-tested high-frequency trading strategies. It essentially entails the constant and simultaneous quoting of buy and sell orders.

Market making is a financial instrument that not only results in market liquidity but is also greatly beneficial to the high-frequency traders involved.

Traditionally, large companies or high-frequency trading firms provide market makers, which is considered a positive practice in the financial markets. 

Statistical Arbitrage

This is the practice of speculating on the price difference of the same Cryptocurrency across different exchanges. The first trader to notice these discrepancies usually utilizes this information to their maximum advantage.

Of course, you require robust and fast processing computers, complete with updated high-frequency trading software, to practice statistical arbitrage. It has an overall effect of equilibrating the market by balancing the prices. 

Smart Order routing

High-Frequency Traders can simultaneously access liquidity pools, identify the best order routing destination, and optimize order execution. A pre-defined or real-time market is scanned to give the best bid and offer quotes for a specific order, thus achieving the best price. 

Maximizing on short-term opportunities

People commonly refer to maximizing short-term opportunities as scalping on steroids. High-Frequency Trading uses potent computers with the processing capacity for speedy algorithmic trading to secure several orders within a fraction of a second. 

Maximizing the trading volume

With High-Frequency Trading, also known as high-speed trading, traders leverage automation to their advantage. Not only are these high-frequency traders able to carry out high volumes of transactions, but they also benefit greatly from the slightest price fluctuations. 

Conclusion

Although largely used by institutional investors, High-Frequency Trading in crypto is available to everyone, including the various market participants. There are several advanced High-Frequency Trading algorithms that everyone can access at favorable prices. However, market participants need to do their due diligence to ensure that the algorithm is legit and efficient.

If you too plan on participating as a high-frequency trader in the New York Stock Exchange or other financial markets, make sure you play your cards right. After all, High-Frequency Trading can be a tremendous opportunity instead of the investment vortex that most people think it is.

Tags