What is Automated Market Making, or Algorithmic Trading?

To begin our understanding – First a couple of definitions:

According to quantinsti.com – “The automated trading system or Algorithmic Trading has been at the centre-stage of the trading world for more than a decade now. A “trading system”, more commonly referred to as a “trading strategy” is nothing but a set of rules, which is applied to the given input data to generate entry and exit signals (buy/sell).”

Wikipedia describes Automated Market Making or Algorithmic Trading as such: “Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading was developed to make use of the speed and data processing advantages that computers have over human traders.”

Simply put: Algorithmic Trading makes use of trading and rules-based Algorithms to carry out automated trading.

A Bit Further in-depth:

Often trading is done using a process of instructions (algorithms) that are automated and pre-programmed to account for such mutable variables as price, timing, and volume. This system is called Algorithmic Trading. Utilized, it will send small bits of a full order to create open-orders on the market.

These trades can be successfully carried out at a much faster pace and repetition than humanly possible. Opening up the possibility of generating quicker profits.

Profits are always welcome for traders; however, another plus in Algorithmic Trading results in more liquidity. Also, trades are more systematic because FOMO and other emotions are not a factor in trade activities.

Making use of complex formulas, mathematical configurations with some human oversight, Algorithmic Trading makes trading decisions to buy or sell assets on an exchange. This is often done using High-Frequency Trading, by which thousands of trades are made per second! Algorithmic Trading can be used in various scenarios, including arbitrage, order execution, and trend strategies.

Algorithmic Trading has grown in popularity and is widely used by rudimentary investors and corporate trading firms for various purposes.

Although it makes for faster trade execution and lowered costs, Algorithmic Trading can have a downside. It can provoke the market’s negative tendencies by causing flash crashes and loss of liquidity.

An Example:

Suppose the algorithm is set with these two rules:

  • BUY 5 BTC when the cost falls below XX,XXX
  • SELL 5 BTC when the value goes above XX,XXX

The computer program will consider these two rules and monitor the asset values and place the buy and sell orders when the defined rules are met. The Algorithmic Trading system automatically sets the orders by correctly determining the opportunity to trade. This frees the trader from constantly observing charts and live prices or entering orders manually

Some of the Benefits of Algorithmic Trading:

  • The BEST possible prices are accomplished in the trades.
  • Order sequence is prompt and systematic (giving a high chance of completion)
  • Reduced transaction costs.
  • concurrent checks are made on market conditions
  • The risk of errors when placing manual trades is significantly reduced
  • The system can be checked to ensure a viable trading strategy is being used
  • FOMO and human error based on emotion are also reduced considerably in the trades.

In Conclusion:

Algorithmic Trading could have useful applications for those who have little knowledge of or lack the desire to trade or, perhaps, time-restricted but still wish to benefit from asset trading.

About the author

Born in Illinois and the third oldest child of 10 children. Gail learned many lessons in life that would serve her well in her future. Patience, sharing, compassion, understanding, love, and acceptance were a way of life. Family is significant to Gail as a mother of three herself.
Gail lives by the motto "live and let live," and she takes pride in helping others. Educated, yes, but believes life is the best teacher and learning depends highly on an open mind.

Comments

  1. I have not heard of this one before it sounds fantastic with the speed of the transactions it is amazing that many transactions can be processed in seconds with high-frequency trading. This is something I would like to experiment with I see there is a con in there so only put in what you can afford to lose just in case.

  2. I knew this was a form of trading, automated trading, but I didn’t know how it was called. It’s outstanding for people who, like many I know, don’t have a clue how to trade. But would like to.
    After all, who doesn’t want to earn whenever possible with their assets sitting there on an exchange (and I am thinking on our DEX…).

    Thank you, Gail, really liked this article. 🤗

  3. I think algorithmic trading is better if you don’t know much about trading and its transaction processes are very fast.It is true that trade should always be done without fears missing out ( F O M O ).Thank you Gail  for your great information on trade.

  4. what a great read Gail — you do not fail in helping around here with such great informational reads — and not being a trader perse’ having mins and maxs for buying and selling would be I think a tremendous way to be a part of the venture without always being right in the middle and taking out human error is always a benefit — thank you great stuff —

  5. Thank you for your comprehensive description of Automated Market Making, or Algorithmic Trading. It could be a way for me to participate in trading, but it feels like it could be risky. Maybe it’s better for me to wait and see if there will be other ways to learn to trade. I do not want to risk doing anything that negatively affects Compumatrix and its members.

  6. Wonderful article about algorithmic trading, Gail! As people understand the pros & cons of trading in general, using an automated algorithm to assist should eliminate FOMO for most. If the algorithm is set correctly, fears of losing will be short lived as traders using this method will quickly see their portfolios grow. It is not quite a set it and forget it method but close & provides more to prevent accidentally devaluing an asset.

  7. Thank you for this interesting article, Gail! Nowadays we have many tools in the market that make use of those trading algorithms. These are called bots and some of them are quite flexible and adjustable allowing many set-up combinations according to the trader’s will and willingness to take higher or lower risks during the trading process. It would be nice if we have something like that in our Compumatrix business. 😉

  8. Well, Gail…it looks like there aren’t any downsides to Algorithmic Trading. That’s good news! For me, the simple act of taking out FOMO would make it worth it!!! Thanks again for another perfect educational piece.

  9. Falling into the category of the Conclusion – the people who have neither knowledge, desire or time, even I had a bit of a pick to my interest. When you said Gail that perhaps using the Algorithmic Trading methods, it could be doable and safer for those the likes of me to try asset trading. I especially liked that the risk of errors is reduced – something that always frightens me! Some more very informative pages for my file!

  10. Thanks for the post Gail. Sounds like Algorithmic trading will be something that can be done by almost anyone who has no time or desire or simply want to take advantage of the asset trading. Your article has made me aware of a way to participate in trading as it sounds like that the risk of error is indeed reduced and that it may be possible to overcome the FOMO.

  11. The words in this blog make me happy. The algorithms may be working for us as we open our businesses in the CDAP of Compumatrix. These are the ways and means of mandating and securing our future. We’ll not be oppressed ways of old and the structures of control. With free hearts, we can operate our businesses that generate transactions in a steady, fast and private manner. Exciting times!

  12. What a nice option for trading, for those of us who have little knowledge of but do wish to do well in trading. The system and the program sets the rules and can guide us all as to what to do, with whatever we have to trade with. So nice to have this option at hand, at the right time, when Compumatrix is opening its doors for us.

    1. Hi Raju. The blogs I do, I am only doing them for information purposes. Whether or not they would be implemented on our DEX or CDAP is irrelevant to the blog. I hope you understand what I write is not a prelude to what will be on our DEX. This information is “out there” in the crypto world, and I like to highlight it to make people aware a bit. That is all.

      1. Thank you very much for clarifying all these technical expressions, we understand how you are trying to educate the members and open their eyes to the new world that Compumatrix is blessing us with.
        Thanks again

  13. I prefer to leave things like trading to experts. It may e possiblee that computer programs can do the job but Iam not qualified to judge which is best for my situation. The less opportunity for fraud the better. It seems that hackers can infiltrate almost anything these days and steal or vilify at will and despite all clims to the contrary so called social media have no control on who posts what.

  14. Will leave the trading for the experts, this is one area that is so complicated for me, but sure its good to learn and get to understand several terms used. Our CDAP will be my home, maybe I will still with term, never say never.

  15. Hello Gail. Yes. I do understand that it is for information purpose only. In my case, it is more for the knowledge , which gives me guidance and direction. Your blogs are very educative and interesting. . Thank you once again, Gail.

  16. Isn’t this what Trading bots do, follow orders.
    Trading is a serious doing, it can make you lose all your investment or devalue the price of an asset if you don’t know what you are doing.
    This Algorithmic trading seems to bring less stress on the trader.
    Thanks, Gail for another teaching in Crypto and financial education

  17. Thank you for a clear and informative article on algorithmic trading. My dilemma has been choosing the correct site for algorithmic trading. There are many to choose from so I found myself overwhelmed and decided not to pursue it. That is why I appreciated the Compumatrix bundles. I trust the Compumatrix bundles.

  18. Gail, you have a way of taking something that may be seen “out there” as complicated and present it in a way that opens the mind. The simplicity of your explanations on so many different areas of this business has helped many understand what we have been trying to show them for years. The comments reflect the light bulbs turning on as understanding becomes a reality.

  19. Algorithmic Trading sounds like a very useful tool for traders. I like that it can be set to perform trades on its own so that you don’t have to be constantly monitoring the charts yourself. I’m not a trader myself, since I only know the mere basics, but I can see how this tool would help a amateur trader.

  20. Thank you Gail we always learn something new when your involved. I did feel a light bulb go off Erline as you read your thinking. I have to go over this again. I’m glad they are always here to go back to. I like Kristin feel safe with our bundles. I feel when the site opens we will have ease and grace ay doing things. and we will all be amazed.

  21. Thanks for your description Gail! I will probably stay away from all kinds of trading, at least until I learn more about how it works. Maybe this kind of trading can be something for me eventually, but first I want to wait for our “new revised” CDAP and see what we can do there.
    I am so grateful for all the explanatory blogs you write!

  22. Another great blog Gail, you have a very good way to explain the Crypto Currency and the Algorithmic Trading, reading through the announcement regarding the Compumatrix Automated Liquidity Pool Rising, which is very much applying the Automated Market Maker really great ideas for the members who would like to trade without F O M O, fears of missing out. God bless Compumatrix and its board.

  23. Very unique simple and to the point Sophey! Love it how you started with 2 simple rules of logic, and anyone with any knowledge of trading can then imagine which rules would be added to further refine the process. I remember at one point we were going to have a trading bot, and I had hoped then things had progressed to a point where we could grow safely and securely. I do believe the technology has now caught up with us, and my hopes; Thanks again!

  24. Alogrythmic trading falls into 2 categories. Human programmed and AI. Where the Human programmed follows the parameters of what the trader specifies. As Gail described. AI – or Artificial intelligence, is a different sort of robot. It learns from market trends and previous highs and lows. Only human interaction is to set it up and let it loose over a specific time period. It changes the parameters as the market trends change and is usually far better at producing gains. These are the ones that cost millions of $$ to create and to purchase. They have also been known to outperform anything else on the market.

  25. Thanks for another good blog Gail. I felt as you were talking and explaining things to me personally. I am a little nervous about trading and turn away from it. After this blog I will be going to take a closer look at it and weighing the pros and cons of it.

  26. Thank you for this very informative blog post Gail. I never heard of Automated Market Making, or Algorithmic Trading. It is completely new to me and I certainly have to take a closer look to it because I am not really good at trading. Thanks again for the explanation.

  27. This looks very interesting. Since I have very little experience in trading (as in none), this looks like a very good guide as to what to do. It could not come at a better time with our new CDAP about to open it’s door. Of course, I don’t want to make any assumptions as to what will work or not work with the CDAP, but it at least “looks” like another option.

  28. coming back and studying this a third time time –this is so much a possibility not just for me because that Light went off this time reading — it is in basics similar to a recipe — and being an old time numbers guy — there are certain trends in everything and with computer bots or ??? doing the action — speed is of the essence — it is really starting maybe anyways — lol will keep studying — thank you Gail —

  29. Well written article that puts the two trading possibilities in to perspective. This will be a good reference point to look back on to renew the mind of the two different arenas of trading no matter what you are trading in. Again, a very well written piece on types of trading.

  30. Once again a very Educational and simplified explanation about Algorhythmic trading of any or all assets in ones possession.It I am sure will help us all the newbee traders to look deeper into this and make use of it if applicable.I for one will be delving deeper to understand the real and easier working utilizing the system. Thanks again.

  31. Being someone with zero trading knowledge, this sounds like an excellent set it and forget it scenario. Simply because the computer would do all the heavy lifting. However, logically speaking it probably would not pay to go off leaving for weeks at a time; returning expecting to have gained great results … or could you? On the other hand; using computer algorithms could truly afford one an advantage once you have reasonable knowledge of trading, of course, and have learned how to use the algorithm system. Something to keep in mind is that; knowing how to trade successfully will be a major tool for building and enhancing our Compumatrix business and should be included in all our tool boxes. Guess I’d better get cracking.

  32. When I saw the picture of the man at the board, I thought of my dad who had been a mathematician and would constantly write out formulas on the blackboard, he would say to keep his mind going. It was when he stopped doing this that he seemed to become more forgetful. So challenging the mind to stay knowledgeable is always a good thing.

  33. This sounds great. I know that the right Algorithmic Trading formula, it seems a win-win. A person new to the platform can still succeed without hurting themselves (or others) badly in the process. If you monitor what is going on, you are bound to learn some of the things that the computer is doing to facilitate trades. For me, it is a learning journey!! Thanks Gail.

  34. Since every person has their own algorithms and patterns that they follow with cryptocurrencies, I think it is important to learn and study as many as you can so you can pick the best algorithm for yourself. This trading formula seems very efficient and productive and I will incorporate this with my future transactions.

  35. this read in Algorithmic trading is so much a learning trend for me — i will continue to come back and read — and each read more becomes understandable — and I can actually see true probabilities in future trading and having a true formula like a recipe for success — it really works — thanks again for great info —

  36. Was recently listening to a world trends program. Onew of the things they mentioned was that these “robots” that are being used for trading on all markets, will, one day replace the trader completely. Yes, they have a down side. One MUST know how they work and the proper programming technique. We must also look very closely at all the schemes out there that say they use automated bots for 70 billion % increase a day.. Just give us your money.:) I recommend staying away from them. 🙂 Great post Gail.

  37. This makes sense. Trading simplified for people that aren’t as knowledgeable about trading. But it seems there still needs to be monitoring to ensure that the high price set for selling hasn’t become a price that is lower than the market…. or does it happen so fast that this is not possible? Thinking out loud (or via type LOL) and probably not making total sense. So the high price for sell, arrives and the trade happens even if the price continues to rise significantly.

  38. Interesting post Gail , Trading with robots on the Dex are just not working for a hands on trader. They win out every time with me, It is loosing battle on my part and really discouraging to me ..I guess that is what has to be done. I guess if you can’t beat them you join them . LOL

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