Speed is a game-changer in HFT. Here is a guide to crypto high-frequency trading
High-frequency trading (HFT) is where many deals are analyzed and carried out quickly, typically in seconds. Profiting from slight price discrepancies in the market is the aim.
Every time they trade, the traders make a small profit and want to accumulate more significant profits over time. Humans cannot operate at the pace required for HFT because you would need to open several close deals in seconds to make short-term gains. To track and implement signals for this, experts suggest employing algorithmic technology. Faster algorithms have the edge over slower ones while trading. After years of use in the stock and FX markets, the trading strategy has just been applied to the cryptocurrency market.
The trading strategy makes short-term price predictions to identify market circumstances that people cannot see or respond to quickly enough. The algorithms scan real-time market data and information to find good possibilities and govern the schedule for issuing market orders. Arbitrage trading, bid-ask trading, and other short-term trading strategies for comparable algorithmic needs can all employ HFT trading.
There is potential for arbitrage trading due to small price discrepancies between cryptocurrencies on different exchanges. Arbitrage trading is used to capitalize on minute price fluctuations across businesses or between marketplaces on the same exchange. It would be best if you sold at a higher price on one exchange or market and purchased at a lower price from another exchange or market. Before a market price change, this drawn-out procedure must be completed swiftly, practically simultaneously. News events and price speculation can occasionally lead to arbitrage trading opportunities. This tactic is also known as the market-making tactic. Using this strategy, traders attempt to profit on the spread—the difference between the bid and ask prices. They simultaneously execute buy and sell orders to take advantage of the spread. They continue to do this, hoping to make a tiny profit on each deal until the cumulative gain is large. The algorithm’s goal, in this case, is to generate a small profit from the small spread in a second or two. The spread is modest, virtually negligible, but since HFT traders trade in massive volumes, it doesn’t really matter.
As a short-term trading method, high-frequency trading only involves betting on price movements based on recent activity and analytics. It is similar to a scalping trading technique or a quick scalping way that uses sophisticated computers to lock in profits in a matter of seconds or even milliseconds. As it tries to be the first to profit from a new trend, HFT undoubtedly provides institutional traders and large corporations with hedging in crypto trading.
The pros of crypto HFT are listed below:
- Trading automation and speed: You won’t need to open and close the trades manually. Instead, the entire procedure is automated, increasing your transactions’ effectiveness. The algorithm handles all the work so that you can guarantee greater efficacy and a complete lack of emotional involvement in your transactions.
- Effective in both liquid and illiquid markets: HFT may be used to trade in both liquid and illiquid markets. This is due to the fact that the entire transaction often occurs very quickly and there is no need for high-market liquidity. Additionally, it enables customers to take advantage of price changes before they reflect entirely in the order book.
- Market Liquidity is provided: Since it frequently includes several deals, high-frequency trading can enhance market conditions. It also keeps the market’s liquidity flowing continuously, supporting tight ask and bid prices.
The cons of crypto HFT are listed below:
- Huge Losses Could Happen: The technique puts much faith in algorithms. Sadly, the algorithms are only as good as those who developed them. Therefore, if there is any mistake in its composition, you might lose much money or your entire trading balance.
- Ghost Liquidity: The trading style’s quick-disappearing liquidity is a source of debate. Since HFT’s trading window is so small, many traders might not be able to benefit from it. This leads to the conclusion that the market doesn’t benefit from the liquidity HFT provides.
It is challenging for regular traders to trade because high-frequency trading demands a trading frequency comparable to or even at the level of the major market participants. The algorithmic specifications are stringent. It would be best to have strong computers to evaluate and execute huge deals quickly to execute the trades. The HFT trading style is not suitable for novices and is not a game. Before attempting any algorithmic or automatic trading, we advise people new to trading to start by making manual transactions. However, using automated tactics could be a fantastic alternative if you need more time to learn how to trade or to trade yourself. Another option is to engage in crypto social trading, which allows experts to handle your funds while you maintain a decent amount of control.
