You’ve probably heard the term ‘artificial intelligence’ and perhaps wondered what it means. Basically, artificial intelligence or AI refers to the application of algorithms to data. An algorithm is a step-by-step process that is used to solve a problem or reach a conclusion. An intelligent algorithm takes this concept a step further – it can ‘learn’ from the data it processes and become progressively smarter. This is the concept behind the smart trading algorithm that has been built into the bitcoin trading software seen on the Dragons Den bitcoin trader episode.
The algorithm in this bitcoin trading software is programmed to monitor the prices and movement of bitcoin as it trades on the cryptocurrency markets. The software cleverly ‘learns’ from the data provided by these trends, enabling it to make increasingly smarter, faster trading decisions. And the more bitcoin trading data it’s exposed to, the smarter and faster the algorithm becomes.
Trading algorithms are not new. Share traders and companies involved in share trading have been using them for a long time. Or for nearly as long as computers have been around at least. Trading algorithms have a number of advantages:
- They monitor the markets, removing the need for a human to do this; humans can very easily miss critical data
- They can instantaneously identify trading opportunities based on a pre-determined set of conditions that’s been coded into the algorithm
- They can make trading decisions the second a trading opportunity arises
- They can instantly and accurately place trade orders much faster than a human can, which reduces the chances of missing an optimum price
- They remove the human error factor that is always possible with manually placed trades
- They can execute trades at the best possible prices
- They can reduce transaction costs
- They can monitor multiple market conditions, allowing rapid trading over different markets for optimum financial benefits
- They remove the emotional and psychological factors from trading
However, their use in cryptocurrency trading is far more recent. Nevertheless, by the beginning of 2017 it was estimated that around 80% of all cryptocurrency trades could well be automatically made by trading bots, or smart-trading algorithms. And given the way cryptocurrency prices can fluctuate rapidly, it makes perfect sense that traders are relying on the speed and accuracy of trading algorithms more and more.
One of the most common uses of the smart trading algorithm built into the Dragons Den bitcoin trader episode software is in short term trading. Short-term trading refers to buying stocks or, in this case, bitcoin with intent to sell either within a few hours (day trading), a few days or a few weeks. The software is ideal for this. It can accurately monitor the prices of bitcoin and then place instant trades as soon as it identifies a profitable opportunity.
A common trading strategy that uses algorithms is one that follows trends in things like moving averages, price level movements and other technical indicators of the market. That’s because these are simple and easy things to get algorithms to do. They don’t require predictive analyses, price forecasts or any other type of ‘guesswork’. Trends are fact. Trading algorithms can easily be programmed to follow them and then make trading decisions whenever it detects a desirable set of circumstances.