Intermediate

10 months ago

Manual Trading vs. Algo Trading: Which Is Better?


About

How to learn more about crypto trading? While exploring various strategies and indicators, you also need to distinguish between manual and automated approaches. This guide shows the difference and explains how they work.


Contents

What is manual trading?

Manual trading is the process where a trader manually opens and closes positions, as opposed to automated trading, where programs execute trades based on particular algorithms. Those who trade manually use trading terminals to consolidate all the information. They can also set up alerts so as not to miss profit opportunities. No transaction takes place without the trader’s go-ahead.

A guide to creating a trading strategy

Pros of manual trading

  • All trades are under control. The person decides when to open and close positions by taking into account the current situation on the market. No transactions take place without the trader's consent.
  • A broader view of the market. Traders can analyze news and other external factors that might impact the asset price but are often overseen by bots. Plus, they can predict how the market will behave after the release of the new information.
  • Quick reaction to changing market conditions. A trader can reveal impactful market trend alterations and adapt his strategy in a matter of minutes. A bot's algorithms, on the other hand, can’t be adjusted automatically in such cases. 

Cons of manual trading

  • Humans’ capabilities are limited. A person can’t keep tabs on too many assets/pairs and too many indicators. 
  • It’s impossible to track the market 24/7. Some price changes and trading opportunities inevitably get missed.
  • It requires a lot of commitment. It takes a lot of time to analyze indicators and manage all trades manually. 
  • Not suitable for some trading styles. This approach doesn’t work well with some strategies, for example, scalping (very short-term trades).

How to test a manual trading strategy 

To develop your best manual trading system, you need to test various tactics and approaches. For testing, experienced traders recommend opening at least 200 trades and performing them according to your plan. In real time, it would take over a year. With a strategy tester in manual mode, it will take no more than 2-3 hours.

Backtesting can be done on crypto trading platforms, for example, 3Commas, Cryptohopper, Cleo.one, and others.

Backtesting terminal on 3Commas
Backtesting terminal on 3Commas

What is algo trading?

Crypto trading bot terminal

Algorithmic trading is fully automated: a bot opens and closes positions according to market signals. A trading bot is software that’s programmed to open and close deals automatically based on preset algorithms. Bots are programmed to analyze numbers: indicators, price moves, price history, etc.

An algo trading strategy is based on a combination of several parameters. Most often, algorithms are created by bot providers. For example, the 3Commas trading platform also offers a trading bot marketplace. Its users can change such parameters as the maximum number of active deals, strategy, base trade size, safety trade size, and more:

Settings in 3Commas bot

With bots like this one, traders can select a range of currencies or create pair “blacklists”:

Blacklist of currencies for trading

Also, users are free to define the source of trading signals:

3Commas bot users can choose the source of trading signals

There are also hand-made bots, which are created by traders who have programming skills. For these bots, parameters are manually set by the owner, and positions are managed according to the trader's strategy. The fewer changeable parameters a bot has, the less the trader's influence.

Bots can be programmed to analyze multiple data sources. When the data coincides with the indicators set up by the owner, the bot will place an order. Some very complex bots analyze several dozen indicators simultaneously.

But does the quality and profitability of trading depend on the number of parameters analyzed by a bot? Not necessarily. Whatever program you use, it’s important to understand what’s inside and how the analyzed indicators work. 

Pros of trading bots

  • 24/7 availability. A bot will never miss a trade or succumb to emotions. It follows a pre-defined algorithm from the moment it’s launched. That takes the load off the user.
  • Ability to quickly analyze data. A trading bot is a computer program capable of powerful calculations. If your trading approach involves either processing large amounts of information in a short period of time or making very fast transactions, automation can help you with that.
  • Simultaneous trading of several assets. Bots make a profit with several exchange-traded assets. It is difficult to manually analyze several cryptocurrencies at the same time. If signals start arriving at the same time, some of them can be missed or even confused. A bot will be able to make deals with any number of specified assets.
  • Possibility of implementing more indicators. If a user wants to involve additional market signals in the trading process, bots can be used in tandem with the main strategy.

Cons of trading bots

  • Complexity of news and fundamental data processing. Trading bots are not designed for news trading and do not always correctly perceive fundamental indicators, for which they have to analyze external sources. Since bots do not understand the causes of news or socio-economic factors, they can make errors. 
  • Incorrect perception of micro-changes on the market. Your bot may trade well during an uptrend or periods of high volatility, but it may not be efficient enough for a sideways market phase. To avoid losses, it is necessary to constantly adjust the bot’s settings. Plus, it should have built-in risk and money management features. If a bot starts making a series of losing trades, you need to shut it down.
  • Unclear algorithms. Programs with incomprehensible algorithms are a black box. They might work in the beginning, but cease to be profitable after a few market changes. 

Manual trading vs. automated trading: What is better?

Manual
Automated

Decisions can be influenced by emotions.

No fears or emotions impact the efficiency.

No predefined rules for buying or selling.

All the rules of the algorithm are predefined and tested.

A trader has to monitor the market 24/7.

The bot keeps track of signals and monitors the market constantly.

Risk management is crucial to reduce losses.

Risk management features are built into the algorithm.

No guarantee of success, because the human factor impacts the efficiency of strategies.

Each algorithmic approach is backtested, so the chance of success is higher.

Significant price slippages may occur.

Positions are closed and opened at predefined levels, which reduces slippage.

A trading system comparison shows that there is no single correct approach: in fact, using both approaches in tandem can bring you maximum profit.

Each trader should follow a certain strategy, but the market is constantly changing, and the trading strategy must be adjusted accordingly. These changes can be either global (asset correlations, reactions to certain statistics, etc.) or local (adjustment to volatility, reaction to levels, breakout / rebound pattern, etc.). 

Also, minor changes can accumulate and have a bigger impact than expected, so a trading bot that used to work well may cease to be as effective as before. Hence, both manual and automated trading strategies need timely adjustments.

Remember that no program will ever completely replace a trader. You can't count on a bot and leave your trading terminal unattended. Yes, a bot can facilitate routine work, but a trader must continue analyzing the market (albeit less intensively) and control the process.

FAQ

What is manual trading?

This is a process where all deals are opened and closed by the trader personally. A person analyzes the market and is responsible for entering and exiting positions at the right moment.

What is algo trading?

Deals are opened and closed automatically by a trading bot, special software that analyzes technical indicators and the asset price history to predict its movements and make profit on them. Since bots don’t have emotions like fear or impatience, they trade more consistently. This approach means a trader doesn’t need to monitor the market 24/7, but can manage positions automatically.

Which trading option is the most efficient: manual trading or algo trading?

With manual trading, you should be prepared to dedicate a lot of time to market analysis and make decisions on your own. Algo trading requires basic technical knowledge for you to understand the algorithms at the core of a bot and avoid buying a black box. A combination of both methods is likely to be the most fruitful.