You’ve likely heard of people mentioning day trading in the crypto sphere. While it’s a common trading strategy in many markets - from forex to commodities to stocks - it’s become a popular means of making money within the crypto market in recent years. Day trading requires time, effort, and understanding of trading patterns, which we’ll outline below, giving you a comprehensive understanding of how to day trade cryptocurrency.
What Is Day Trading?
Day trading is a trading strategy made popular from the stock markets that open and close each day. Traders would open positions (trades) in the day, and then close them before the stock markets closed that evening, capitalizing on the market’s movements.
With the renowned market volatility of cryptocurrencies (see here why volatility isn’t necessarily a bad aspect), day traders are able to tap into exciting price movements which may lead to profits (or losses). The idea behind day trading is to obviously make decisions that lead to profits within a day’s time frame. In trading terms, crypto day trading is about opening and closing positions in the crypto market within a day.
How Do I Make Money Day Trading Cryptocurrencies?
Day trading should not be looked at as a get-rich-quick scheme, and the same goes for cryptocurrencies. Instead, the trading strategy should be viewed as skills that are acquired through research, experience and understanding. Through the use of technical analysis, successful day traders identify patterns within the markets on which they base when to open and close positions. They will look at aspects like chart patterns, price action, technical indicators, volume, and of course, incorporate risk management in order to minimize any losses.
Slightly riskier however still an option, some crypto day traders prefer to “trade the news”, taking advantage of cryptocurrencies with high volume that have recently had fluctuations in price following a news announcement. If you’re new to day trading we would definitely not advise this option, instead, opt for highly liquid market pairs.
Arguably two of the most important aspects of day trading one needs to look at are the particular cryptocurrency’s liquidity and volume. As you’re looking to profit on the market’s volatility, good liquidity will better allow you to make quick trades (specifically closing positions).
If you’re looking to make money day trading cryptocurrencies, start small and slow. Create a watchlist of high liquidity trading pairs, select one of these based on technical attributes and settle on a strategy (outlined below) that best suits your experience and market interpretations. As a general rule of thumb when trading cryptocurrencies: don’t risk more than you’re willing to lose.
Strategies To Day Trade Cryptocurrency
In this segment, we will be looking at three popular day trading strategies that successful day traders have used when navigating the markets. These include range trading, high-frequency trading, and scalping.
Range trading revolves around candlestick chart analysis and support and resistance levels. This strategy centres around focusing on price ranges and building trade ideas off of those ranges. It also involves setting up a stop/loss should it break out of this range. A great option for beginners.
An example of range trading: if the cryptocurrency chart presents clear support and resistance levels, a day trader could buy when the price reaches the support level and sell at the resistance level.
High-Frequency Trading (HTF)
A most suited option for advanced traders, HFT is an algorithmic trading strategy that uses bots to enter and exit multiple positions over a short period of time (we’re talking milliseconds). While this sounds effortless, this strategy is highly complex and involves plenty of backtesting, monitoring and tweaking of algorithms. This strategy is typically used by hedge funds and trading firms and requires a complex understanding of mathematics and computer science.
Less technical than high-frequency trading, scalping takes advantage of small price movements over short periods of time, like gaps in the market’s bid-ask spread, liquidity and other market inefficiencies. Due to the nature of scalping being fast-paced and high risk, it’s a common option for more skilled traders, often used in margin or futures contract trading to amp up the rewards. This strategy uses technical indicators like volume heatmaps and order book analysis to determine the entry and exit points.
Day Trading Vs HODL
On one end of the spectrum, we have day trading, involving fast-paced daily trades, while on the other there is HODLing, keeping your chosen cryptocurrencies for a long period of time. Whichever option you go for, ensure that you are informed about the cryptocurrency in question and know what you’re doing.