Dutch Algotrading
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My New EBOOK Launched!
🕑 Added 2024-11-08 13:02:59 +0000 UTCToday I am proud to announce the launch of my new eBook about Algorithmic Cryptocurrency Trading For Beginners: A Comprehensive Guide to Start With Automated Trading. I have worked over a year to create this book and I am finally finished.
This book contains all the information you will need to start Trading Cryptocurrency with Algorithms and eventually with a trading bot. The contents of the book are written below.
This book aims to be a source of information for starting Algorithmic Traders in Cryptocurrency that also want to use a trading bot (although the information also can be applied to normal trading too) and currently fills a gap that I personally missed over the years in my journey. I hope that this will be a solid foundation for those that are just starting, or are looking for a single source of information about this interesting and profitable field of interest.
The book is initially published as a Amazon Kindle ebook. However for Patrons I also have this book available as a exclusive downloadable PDF that is not only permanently cheaper here, but it also has a temporary extra 20% discount (Code: FIRSTBOOK). As a thank you for your continuing support!
CONTENTS
Foreword………………………………………………………………………………… i
Introduction…………………………………………………………………………. iii
1 – Introduction to the World of Algorithmic Cryptocurrency Trading……………………………………………………………………………………. 1
Introduction to Algorithmic Trading………………………………………………. 1
The Evolution and Rise of Algorithmic Trading in Cryptocurrency………….. 2
Why Algorithmic Trading is Ideal for Cryptocurrencies……………………….. 3
Handling the Volatility…………………………………………………………….. 3
Trading 24/7 Without Losing Sleep……………………………………………… 3
Making Data-Driven Decisions………………………………………………….. 4
Flexibility and Customization……………………………………………………. 4
Taking the Emotions Out of Trading…………………………………………….. 4
2 – Understanding Cryptocurrency – The Foundation of Digital Trading……………………………………………………………………………………. 5
What is Cryptocurrency?…………………………………………………………….. 5
The Birth and Evolution of Cryptocurrency……………………………………… 5
Blockchain Technology – The Backbone of Cryptocurrency………………….. 7
The Advantages of Cryptocurrency Over Traditional Money………………….. 8
Decentralization and Control……………………………………………………. 8
Security and Transparency……………………………………………………….. 8
Lower Transaction Costs…………………………………………………………. 9
Accessibility…………………………………………………………………………. 9
Innovation and Flexibility…………………………………………………………. 9
Key Cryptocurrencies You Should Know About…………………………………. 9
Bitcoin (BTC)………………………………………………………………………. 10
Ethereum (ETH)…………………………………………………………………… 10
Ripple (XRP)……………………………………………………………………….. 10
Litecoin (LTC)……………………………………………………………………… 10
Cardano (ADA)……………………………………………………………………. 11
Polkadot (DOT)……………………………………………………………………. 11
Binance Coin (BNB)……………………………………………………………… 11
Solana (SOL)………………………………………………………………………. 11
Dogecoin (DOGE)…………………………………………………………………. 11
Tether (USDT)……………………………………………………………………… 12
USD Coin (USDC)…………………………………………………………………. 12
Understanding the Categories of Cryptocurrencies………………………….. 12
Currencies…………………………………………………………………………. 13
Smart Contract Platforms (Layer 1)…………………………………………… 13
Layer 2 Solutions…………………………………………………………………. 13
Stablecoins………………………………………………………………………… 13
Decentralized Finance (DeFi) Tokens…………………………………………. 13
Utility Tokens………………………………………………………………………. 14
Governance Tokens………………………………………………………………. 14
Privacy Coins……………………………………………………………………… 14
Meme Coins……………………………………………………………………….. 14
Non-Fungible Tokens (NFTs)……………………………………………………. 14
Real-World Asset Tokens (RWAs)……………………………………………… 15
AI Coins…………………………………………………………………………….. 15
Gaming Coins……………………………………………………………………… 15
3 – What is Algorithmic Trading?…………………………………………….. 17
The Evolution of Algorithmic Trading……………………………………………. 19
The Early Days – From Manual to Automated Trading……………………… 19
The Rise of High-Frequency Trading (HFT)…………………………………… 20
The Advent of Algorithmic Trading in Cryptocurrency……………………… 20
The Democratization of Algorithmic Trading………………………………… 21
The Continuing Evolution……………………………………………………….. 22
Key Concepts in Algorithmic Trading…………………………………………….. 22
Trading Indicators – The Foundation of Algorithmic Strategies…………… 22
Categorization of Trading Indicators………………………………………….. 24
The Role of Artificial Intelligence (AI) in Algorithmic Trading………………. 28
AI-Powered Trading Models…………………………………………………….. 28
Sentiment Analysis………………………………………………………………. 28
Reinforcement Learning………………………………………………………… 28
Automated Risk Management………………………………………………….. 28
Algorithmic Market Making……………………………………………………… 28
Trading Signals – Triggers for Action……………………………………………. 29
Backtesting and Forward Testing – Validating Your Strategy………………. 30
Common Algorithmic Trading Strategies………………………………………… 31
Trend-Following Strategies – Riding the Wave……………………………….. 31
Mean-Reversion Strategies – Betting on a Return to the Average………… 33
Arbitrage Strategies – Exploiting Price Discrepancies……………………… 34
Market-Making Strategies – Providing Liquidity……………………………… 36
Choosing the Right Strategy……………………………………………………. 38
The Tools and Software for Algorithmic Trading……………………………… 38
Trading Platforms and APIs – Your Gateway to the Market………………… 39
CCXT Python Library – A Universal API for Cryptocurrency Exchanges…. 40
Coding Environments – Where Algorithms Come to Life………………….. 42
Backtesting Tools – Validating Your Strategies………………………………. 45
Popular Backtesting Tools for Algorithmic Trading…………………………. 46
Data Providers: The Lifeblood of Algorithmic Trading……………………… 47
Equipping Yourself for Success………………………………………………… 48
The Role of Data in Algorithmic Trading…………………………………………. 48
Types of Data Used in Algorithmic Trading…………………………………… 48
Data Collection – Gathering the Right Information…………………………. 51
Data Quality – The Foundation of Accurate Analysis……………………….. 52
Data Analysis – Turning Raw Data into Actionable Insights……………….. 53
Challenges in Data Collection and Analysis………………………………… 55
Leveraging Data for Competitive Advantage………………………………… 56
Mastering Data for Successful Trading……………………………………….. 57
Challenges and Risks of Algorithmic Trading………………………………….. 57
Overfitting – The Pitfall of Overly Tailored Algorithms………………………. 58
Latency – The Hidden Risk of Delayed Execution…………………………… 59
Market Impact – Balancing Order Size and Market Stability………………. 60
Continuous Monitoring and Optimization – The Key to Long-Term Success……………………………………………………………………………………….. 61
Navigating the Complexities of Algorithmic Trading……………………….. 62
4 – Risk Management and Bias in Trading…………………………………. 63
What is Risk Management?…………………………………………………….. 63
Importance of Risk Management in Algorithmic Trading………………….. 63
The Role of Risk Management in Trading Success………………………………. 64
Types of Risks in Algorithmic Trading…………………………………………….. 65
Market Risk………………………………………………………………………… 66
Liquidity Risk………………………………………………………………………. 67
Execution Risk…………………………………………………………………….. 67
Systemic Risk……………………………………………………………………… 67
Technology and Operational Risk……………………………………………… 68
Counterparty Risk………………………………………………………………… 69
Core Principles of Risk Management in Algorithmic Trading………………… 69
Position Sizing and Leverage Control…………………………………………. 70
Risk-Reward Ratios and Setting Profit Targets………………………………. 70
Stop Losses and Take Profits…………………………………………………… 71
Diversification and Hedging…………………………………………………….. 71
Risk Allocation Across Strategies……………………………………………… 72
Quantitative Approaches to Risk Management…………………………………… 72
Volatility Management…………………………………………………………… 72
Value at Risk (VaR)……………………………………………………………….. 73
Drawdown Control and Maximum Loss Limits……………………………… 73
Sharpe Ratio and Risk-Adjusted Returns…………………………………….. 74
Monte Carlo Simulations and Scenario Analysis…………………………… 74
Risk Management Tools and Technologies………………………………………. 75
Developing and Implementing a Risk Management Plan………………………… 75
Designing a Risk Management Strategy for Your Algorithm………………. 75
Integrating Risk Management into Algorithm Development………………. 76
Risk Monitoring and Adjustments……………………………………………… 76
Disaster Recovery and Contingency Planning………………………………. 77
Psychological Aspects of Risk Management…………………………………….. 78
Understanding Risk Tolerance and Trader Psychology…………………….. 78
The Impact of Overconfidence and Fear on Risk…………………………… 78
Consistency and Discipline in Risk Management………………………….. 79
Understanding Biases in Algorithmic Trading………………………………….. 80
Confirmation Bias………………………………………………………………… 80
Survivorship Bias…………………………………………………………………. 80
Lookahead Bias…………………………………………………………………… 81
Overfitting………………………………………………………………………….. 81
Anchoring Bias……………………………………………………………………. 81
Recency Bias………………………………………………………………………. 81
Hindsight Bias…………………………………………………………………….. 82
Loss Aversion……………………………………………………………………… 82
Herding Bias……………………………………………………………………….. 82
Availability Bias…………………………………………………………………… 83
Self-Attribution Bias……………………………………………………………… 83
Endowment Effect……………………………………………………………….. 83
Disposition Effect…………………………………………………………………. 84
Gambler’s Fallacy………………………………………………………………… 84
Framing Effect…………………………………………………………………….. 84
Sunk Cost Fallacy………………………………………………………………… 84
Embracing Risk Management as an Ongoing Process………………………….. 85
Why Risk Management is Essential…………………………………………… 85
Encouragement to Continuously Review and Adapt Risk Management.. 85
5 – Creating your Algorithmic Trading Bot…………………………….. 87
Creating your own cloud based server………………………………………….. 87
Creating a Cloud Service Provider account…………………………………. 87
Finding out the location of the Exchange…………………………………….. 89
Creating your own Cloud server……………………………………………….. 90
Connecting to the server through SSH……………………………………….. 95
Securing the server………………………………………………………………… 100
Changing the hostname……………………………………………………….. 100
Create normal user and disable root user………………………………….. 101
Install and configure a firewall……………………………………………….. 105
Hardening the SSH server…………………………………………………….. 107
Update the system……………………………………………………………… 110
Enabling automatic updates………………………………………………….. 112
Configure the timeserver………………………………………………………. 113
Installing the trading bot…………………………………………………………. 116
Introduction to Freqtrade……………………………………………………… 116
Key Features of Freqtrade…………………………………………………….. 117
Why Freqtrade is Ideal for Beginners………………………………………… 117
Caveats of using Freqtrade……………………………………………………. 118
Installing Freqtrade: A Step-by-Step Guide (Linux)……………………….. 119
Installing Freqtrade: A Step-by-Step Guide (Docker – on Linux)……….. 128
Post-Installation Activities……………………………………………………….. 132
Activity 1 – Pairslists…………………………………………………………….. 132
Activity 2 – Downloading data…………………………………………………. 136
Other Post-Installation Activities…………………………………………….. 139
Understanding the Freqtrade Configuration…………………………………. 140
Breakdown of Freqtrade’s Sample Strategy…………………………………… 150
Freqtrade as a Systemd Service…………………………………………………… 167
Modifying the config.json File…………………………………………………. 167
Creating the freqtrade.service File…………………………………………… 169
Enabling Freqtrade as a Service……………………………………………… 170
Freqtrade as a Docker Service…………………………………………………… 173
Multi-Bot Orchestration………………………………………………………….. 177
Multi-Bot Orchestration with Systemd……………………………………… 177
Multi-Bot Orchestration with Docker………………………………………… 178
Monitoring and Maintaining Your Freqtrade Bot…………………………….. 180
Monitoring Your Bot’s logs…………………………………………………….. 180
Troubleshooting Common Issues……………………………………………. 181
Setting Up Maintenance Routines…………………………………………… 181
6 – Strategy Development and Coding…………………………………… 183
The Creative Process of Developing a New Trading Algorithm…………….. 183
Writing the Rules of the Trade…………………………………………………… 184
Creating a Swing Trade Strategy…………………………………………………. 185
Technical Indicators……………………………………………………………. 185
Entry Rules (Buying Signals)…………………………………………………… 186
Exit Rules (Selling Signals)…………………………………………………….. 187
Stop Loss Settings………………………………………………………………. 188
Overall Strategy Summary…………………………………………………….. 189
Creating a Freqtrade Strategy File………………………………………………. 189
Making a copy of the sample file…………………………………………….. 189
Strategy file edits………………………………………………………………… 193
Adding Hyperparameter Optimization Settings………………………………… 200
7 – Backtesting, Analysis, Optimization and Forward Testing… 206
Introduction to testing and analyzing………………………………………….. 206
Setting Up Backtesting in Freqtrade…………………………………………….. 206
Backtesting Your Strategy with Freqtrade…………………………………….. 207
Checking the Data and Strategies…………………………………………… 207
Executing a Simple Backtest………………………………………………….. 209
Getting Your First Backtest Output………………………………………….. 214
Other Useful Backtest Command Options………………………………… 218
Analyzing Your Trading Strategies: Key Metrics to Watch………………….. 221
Visualizing Backtest Data with the Bot Software……………………………… 230
Freqtrade Plotting functions………………………………………………….. 230
Other Visualisation Suggestions………………………………………………… 236
Equity Curves……………………………………………………………………. 236
Drawdown Charts………………………………………………………………. 237
Combining Visualizations……………………………………………………… 237
Performance Heatmaps……………………………………………………….. 238
Distribution of Returns…………………………………………………………. 239
Rolling Volatility…………………………………………………………………. 240
Rolling Risk Ratio’s……………………………………………………………… 240
Interpreting Visualizations…………………………………………………….. 241
Optimization and Continuous Improvement Through Backtesting…………. 241
Hyperparameter optimization………………………………………………… 241
The Usage of Spaces in Hyperopt……………………………………………. 242
How do We Measure Optimization “Success”…………………………….. 243
Running Hyperparameter Optimization…………………………………….. 244
Comparing the Optimized Results…………………………………………… 251
Common Backtesting Mistakes and How to Avoid Them………………………. 252
Data Snooping Bias…………………………………………………………….. 252
Overfitting………………………………………………………………………… 253
Ignoring Transaction Costs……………………………………………………. 253
Inadequate Data Quality and Coverage…………………………………….. 254
Ignoring Market Regimes………………………………………………………. 254
Small Sample Sizes…………………………………………………………….. 254
Forward testing…………………………………………………………………….. 255
Fail Fast, Fail Often………………………………………………………………… 257
8 – Comparing and Evaluating Multiple Trading Strategies……. 259
The Importance of Strategy Comparison……………………………………….. 259
Determining Your Scoring Criteria……………………………………………… 260
Using Freqtrade’s Backtest output……………………………………………… 260
Creating the Scoring System……………………………………………………… 261
Building a Spreadsheet for Strategy Comparison…………………………….. 261
Setting Up the Spreadsheet……………………………………………………….. 262
Implementing the Scoring System………………………………………………… 262
Calculating the Total Score……………………………………………………… 264
Timeframe comparison……………………………………………………………… 265
Analyzing and Interpreting the Results…………………………………………. 265
Comparing multiple trading strategies………………………………………….. 266
Taking the next step…………………………………………………………………. 267
Fine-Tuning and Adjusting the Scoring System………………………………… 267
9 – Connecting Your Trading Bot to an Exchange…………………. 269
Creating a subaccount…………………………………………………………….. 269
Creating the API key and secret on the sub account………………………….. 277
Entering the API key and secret in the configuration file……………………. 283
Set the bot’s runmode from Dry-run to Live……………………………………. 283
Starting the bot with the API key…………………………………………………. 284
Checking on the Freqtrade Web interface……………………………………… 284
10 – Legal, Ethical and Tax Considerations in Algorithmic Trading………………………………………………………………………………… 287
Understanding the Regulatory Environment………………………………….. 287
Ethical Implications of Automated Trading…………………………………….. 287
Best Practices for Compliance…………………………………………………… 288
Tax Implications of Algorithmic Trading……………………………………….. 289
11 – Future Trends and Continuous Learning in Algorithmic Trading………………………………………………………………………………… 292
Emerging Technologies in Trading………………………………………………. 292
Adapting to Market Evolution……………………………………………………. 293
The Importance of Continuous Learning……………………………………….. 293
Navigating the Regulatory Landscape………………………………………….. 294
Preparing for the Future of Algorithmic Trading…………………………….. 295
12 – Final Thoughts and Next Steps……………………………………….. 296
Recap of Key Takeaways……………………………………………………………. 296
Your Journey Continues…………………………………………………………… 298
More learning………………………………………………………………………. 299
Books on Algorithmic Trading and Cryptocurrency………………………. 299
Academic Papers on Algorithmic Trading………………………………….. 300
Websites and Online Resources…………………………………………….. 301
Books on Machine Learning and Data Science……………………………. 301
Thank You!…………………………………………………………………………… 302
About DutchCryptoDad…………………………………………………………… 302
Glossary of Key Terms………………………………………………………….. 305
Configuration files and other stuff……………………………………. 311
Obelisk_Ichimoku_ZEMA_v1 config file………………………………………… 311
cat config_bot1.json……………………………………………………………. 311
cat /etc/systemd/system/freqbot1.service………………………………… 312
ClucMay72018……………………………………………………………………… 313
cat config_bot2.json……………………………………………………………. 313
cat /etc/systemd/system/freqbot2.service………………………………… 315
Docker Compose file Bot 1……………………………………………………….. 315
/opt/freqbot1/user_data/config_freqbot.json……………………………… 316
Docker Compose file Bot 2……………………………………………………….. 318
/opt/freqbot2/user_data/config_freqbot.json……………………………… 318
SMA_MACD_RSI Strategy File……………………………………………………. 321
Adjusted SMA_MACD_RSI strategy for Hyperopt…………………………….. 331
Comments
Dutch Algotrading
Thanks, It was worth the effort :-)
Jayson
Congratulations!
