As a crypto trader, there are various strategies to trade and earn from crypto. Some of the strategies are long-term while others are short-term, with both coming with various pros and cons.
If you are looking for a short-term trading option then day trading might be for you.
Here is what you need to know about day trading crypto.
What is Day Trading?
Day trading is a trading strategy where you enter and exit a position within the same trading day. You either enter a long (a trade where you profit if the asset price goes up) or a short (a trade where you profit if the asset price goes down). In traditional markets, day trading can also be known as intraday trading. Crypto separates itself from many traditional finance markets by its 24/7 trading hours, the markets never close.
Day trading crypto requires understanding the little details of market movements with many day trading strategies based on technical analysis. As opposed to other forms of trading, day trading means you don’t hold your position overnight. Given you don’t have several days to take advantage of massive market shifts you have to utilise the little movements within the day.
Even though day trading can feel complex in the beginning, with experience you will begin to understand the nuances of this style of trading.
Factors to consider when day trading
Given the need to maximise profits within a short time, there are various factors on how to day trade crypto that you need to know before entering a position. Some of these are:
-
Liquidity
The liquidity of an asset is how much you can buy or sell without dramatically affecting the price. When an asset has high liquidity, it will often have low spreads and many traders. Most of the major cryptocurrencies will have high liquidity, meaning that even if you buy $1 million worth of Bitcoin, you won’t cause the asset to rise significantly.
-
Volatility
Volatility is the frequency and the size of the asset’s market value change. A highly volatile asset changes value often and with notable shifts. Such volatility increases the chances of making profits and is one of the key metrics that day traders use when deciding what asset to trade.
-
Trading volume
Trading volume indicates the market interest of the asset. A high trading volume means several traders are involved in the asset, hence likely to increase its liquidity. Low trading volume means less liquidity and generally wider spreads.
Understanding these factors will help paint a fuller picture of how and what to trade. Once you have found an asset and ensured that there is sufficient liquidity, good volume and has potentially high volatility, the next step is to determine your trading strategy.
Day trading strategies
There are various day trading strategies to use for whichever trading level. Some are ideal for beginners, others intermediate, while still others are reserved for experts.
Some of the common day trading strategies to use are:
-
Scalping
Scalping is a common strategy for day trading cryptocurrency that takes advantage of small price movements within short durations. The movements can happen due to bid-ask spread, liquidity, or market inefficiencies.
Scalpers open several positions either separately or simultaneously with an aim of making a positive aggregate by the end of the session.
This strategy relies more on technical analysis than it does fundamental analysis, and is popular among advanced traders with bots who can quickly capture market movements or inefficiencies.
-
Range trading
Range trading is where traders trade within the known price ranges often between strong resistance and support levels. It involves making profits when the price of the asset bounces around the known levels (the range). It assumes the resistance and support levels will remain static for an extended period. This trading strategy is ideal for intermediate traders.
-
High-frequency trading (HFT)
High-frequency trading involves setting up trading bots to enter and exit market positions quickly and at a very high frequency. A bot can set up multiple positions within milliseconds and execute a large number of trades.
HFT is a popular trading option among quantitative traders looking to gain an advantage over other firms and the market as a whole. The bots use high-end algorithms to determine possible market shifts and look for market inefficiencies. Given the market is ever-changing, the trading involves detailed backtesting and tweaking the algorithms often.
-
Momentum trading
Momentum trading is one of the simplest day trading strategies. It is ideal for beginners as it is all about trading with the momentum of a price move. Entering along when the asset is rising or entering a short when the asset is falling.
The risk of this strategy is entering a position too late and either buying close to the top or shorting at the bottom. In a worst-case scenario, the momentum trader enters a position just before a reversal.
-
Reversal trading
This is the opposite of momentum trading. It is quite risky as it involves trading against the market trend with the hope of changing tides. For example, you enter a long on a declining asset when you believe the price will reverse and rise or you enter a short when you believe a rising asset will decline.
Reversal trading requires an in-depth understanding of the market trends and, honestly, a bit of luck. One popular indicator traders use in reversal trading is the relative strength index (RSI), which roughly tells a trader if an asset is overbought or oversold.
How to start day trading cryptocurrency
Now that you understand what day trading is and various trading options, it’s time to get started.
Starting day trading crypto is quite easy, even for beginners.
One of the major benefits of day trading crypto is the relatively low starting costs. Unlike trading blue-chip stocks, you do not have to buy full units in crypto. You could begin day trading with as little as $10 AUD, which would give you roughly 0.00016 Bitcoin or 16 satoshis (the name for the lower denominations of Bitcoin). In addition, many crypto exchanges will charge low and per cent-based trading fees, such as Coinspot and their 0.01% trading fees, meaning that you are only charged relative to what you trade. In comparison, a lot of stock brokerages charge flat rates when buying a stock.
The other benefit of day trading crypto is the accessibility to a range of different trading products such as derivatives. In crypto, advanced trading platforms like FTX offer futures, options and leveraged tokens.
Leverage means you can trade a larger position than you could buy normally. For example, if you trade a futures contract at 20x leverage, your $10 trade is now essentially a $200 dollar trade. The risk comes from the higher liquidation price (the price in which you lose your entire trade value). With 20x leverage, a small move in the opposite direction will wipe your entire $10 balance.
Day traders like to use leverage as it means they can make a lot more money on small price movements, but the risks are also much higher. Leveraged trades are only recommended for advanced traders, and it’s never advisable to trade with very high leverage. Now that you understand the basics, you can now begin to get your feet wet day trading.
Here is the step-by-step guide to getting started.
- Register an account at a cryptocurrency exchange.
- Pick the cryptocurrency you would want to trade. Bitcoin and Ethereum are some of the best options.
- Choose the trading strategy that you believe is suitable for that asset and its price movements.
- Deploy the strategy on a demo account.
- Once you have got the feeling of what to expect, start trading with small deposits. Feel free to increase the deposits as you become more conversant with the market movements.
Day trading risks management
Your risk management techniques impact how much you make from day trading. Here are some of the tips to help you stay risk-free when day trading.
-
Use less capital
The 1% rule is one of the most popular in day trading. It states that you shouldn’t risk more than 1% of your account on a single position. The lesser capital you use helps keep you are safe in case of losses.
It is quite easy to be blinded by bullish or bearish movements, and want to use more capital on the single trade. Avoid it completely.
-
Cut losses quickly
When you day trade, you don’t have the luxury of waiting for overnight movements or other long-term market changes. As such, any time you lose, move on quickly to the next trade. This allows you to take advantage of the prevailing market movements.
-
Don’t be too greedy for profits
One of the hardest aspects of day trading is not knowing when to stop. Most so when making profits. Most traders tend to keep going looking to gain more. In the end, they return the gained margins back to the market which can be lost in case of a downturn in the values.
Understand no profit is small in day trading. Secure the profits immediately when you get them and stop at the time you had planned.
-
Keep moving on
Nothing is assured when it comes to day trading. Sometimes you lose, other times you win. What matters is you keep moving on. Do not spend too much time whining over losses or celebrating gains. Instead, understand the market movements and react accordingly to find the next best cryptocurrency for day trading.
FAQs
What is the best time to day trade crypto?
Unlike the stock market with specific market opens and closes, there is no specific best time to day trade crypto. Instead, you only have to ensure the liquidity and trading volumes are high. The crypto market is open 24/7 and you can always monitor the market to determine your ideal trading time.
Is day trading crypto safe?
Like any other crypto trading option, day trading comes with risks. You can either lose or gain on every trading position. However, you can increase your chances of gaining by analysing the market. Also, use the above-mentioned risk management tips to keep safe when day trading cryptocurrencies.
Which cryptocurrencies are the best for day trading?
The best cryptocurrency for day trading is the one that has high volatility. In most cases, these are the ones with low market caps. For example, crypto with less than a $1billion market cap is ideal. However, you can start with the common cryptos like Bitcoin and Ethereum due to available market movements data. Once you have mastered the trade then move to the lower market cap coins.
