My New EBOOK Launched!

Today 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