Algorithm

An algorithm (“algo”) is a set of mathematical instructions or rules, programmed into computer software to produce some outcome or solve a specific problem or set of problems.

In the context of cryptography and data security, cryptographic algorithms have the job of turning readable data into a form of protected data – data that can’t be read easily by the human eye – and back to readable data.

These algorithms are directly involved in data encryption, digital signatures, and authentication.

In the context of trading, algorithms are often used in automated trading or high-frequency trading (HFT) to buy and sell securities in microseconds (one-millionth of a second).

Algorithms can be simple – just a couple of lines of computer code – or then can be complex – some algorithms are thousands of lines long.

An example of a trading algorithm is one based on mean reversion. Mean reversion simply means that price will return to the average over time. Using mean reversion and Bollinger Bands, an algorithm could look for stocks or cryptocurrencies that sit high or low within the bands.

The algo would buy the low-priced security and sell the high-priced security. Over time, price would move back to the mean, or middle, and the algo would do the opposite of the initial orders.

Related Terms

CPU

A CPU, or central processing unit, is the brain of a computer that executes, or processes, the instructions that come from computer programs, operating systems, and other computer hardware. It is the most important part of any computer. CPUs have become an integral component of crypto mining rigs, the computer hardware that is used to […]

Plaintext

Specific to encryption, plaintext is inputted into an encryption algorithm, which then takes that plaintext message and produces a ciphertext. Using the process of decryption, ciphertext can be reversed to generate the original plaintext.

Backtesting

The process of using the rules that make up a trading strategy or algorithm and running them against a historical set of trading data for a given asset, in hopes of determining how your trading strategy reacts in different market cycles and whether you can gain any insight into developing a profitable trading strategy.

Desktop Wallet

A common type of crypto wallet used to securely store and manage your private keys on a computer hard drive. They’re considered more secure than web-based wallets, since you can only access them from wherever your computer is located, and again, you control your private keys.

Encryption

Encryption is a security technique that takes data, like text, and scrambles it into a secret message so it can’t be read by another party. Decryption is what allows the recipient of the secret message to unscramble it back into a readable state. Encryption uses various algorithms or ciphers to do the scrambling.