Day traders exist in most markets including share, forex and of course, cryptocurrency markets. Cryptocurrency day trading is a common strategy used by crypto enthusiasts to make a fast return on investment. However, it doesn’t come without its risks. This guide will cover a number of topics relating to saying crypto including:

  • What is day trading?
  • Day trading vs dollar-cost averaging
  • How do day traders make money
  • Crypto day trading strategy
  • Signals that Day traders use to make price picks
  • The risks of short term crypto trading
  • Frequently asked questions about trading

What is crypto day trading?

Crypto day trading is a type of trading strategy that involves buying and selling crypto assets like Bitcoin within the same day. While some choose to ‘HODL,’ their crypto assets, others use a more short term trading strategy. The primary goal of day trading is to make a profit from the short term price fluctuations. Successful day traders are typically well educated and use technical analysis to capitalise on small price movements in highly liquid cryptocurrencies.

A popular method of day trading is to align trades with news or events that are likely to cause short term market moves. Day trading originated from the stock market but has been adopted by many crypto traders. The main difference between the two is that the stock market is only open during business hours as opposed to cryptocurrency markets which are open 24/7.

Day Trading vs Cost-Dollar-Averaging

Crypto day traders take advantage of high volatility in price throughout the day and try to predict tops and bottoms in an attempt to make a profit. This is very different from another commonly used cryptocurrency trading strategy called dollar-cost averaging (DCA). DCA refers to the process of buying an asset like a stock or cryptocurrency over a long period of time at set intervals regardless of price i.e. every week. month etc. With this strategy, the trader is more concerned about increasing the overall position of an asset rather than timing the market.

Day trading, however, does not rely on such long term strategies to maximise profits. These two strategies are very dissimilar. The amount of time from one trade to the next is significantly shorter when you are a day trader compared to a DCA trader. DCA is generally considered a better option for beginner investors as it’s safer and involves more autonomy and less research. Day trading, on the other hand, can be lucrative if done right.

How do day traders make money?

Day trading is complicated and often hard to make money from. There are, however, several strategies and techniques that day traders utilise to better understand cryptocurrency market movements. One common technique that day traders use is technical analysis. This includes components like chart patterns and trends, 24hr trading volume, price action and technical indicators to identify potential entry and exit price points.

Although fundamental analysis is a common investing strategy, especially in cryptocurrency markets, it is not overly used by day traders. This is because fundamental aspects of a particular coin or token may take months or even years to play out. Trading on the back of the news, however, is a common strategy. This involves purchasing an asset following a recent announcement that is likely to spark enthusiasm in the industry and cause a price spike.

Factors to Consider Before Day Trading

The world’s most successful day traders are highly educated in the technicalities of trading. They need to understand a variety of different techniques such as the power of leverage, as well as other shorter-term trading strategies to defeat the odds stacked against them. Trading strategies help people capitalise on price movements that occur in highly volatile markets like crypto.

Factors that can cause price fluctuations include but are not limited to:

  • Breaking news
  • Job reports/ unemployment rates 
  • Earnings reports 
  • New product features 
  • Competitor announcements 
  • Industry changes 

Crypto Day trading strategies

Scalping

Traders who use ‘scalping’ place very short term trades that aims to take advantage of small movements in price. Scalpers attempt to make or ‘scalp’ a small profit from every trade that accumulate to make a large profit. These small price movements can be a result of liquidity, spreads or other market inefficiencies.

Consistency and speed are two main components that will determine the success of a scalping strategy. Traders using this strategy must have a strict exit strategy as one large loss could be detrimental to all other smaller profits made.

Range trading

A trading range occurs when the price of an asset bounces consistently between two price levels over a definitive period of time. Range traders look for price trends within a market structure and create trade ideas to buy and sell based on those ideas. For example, these two levels could be support and resistance level. Range trade could use these two price points as a top and bottom to buy and sell at.

News-based trading

News-based trading or ‘trading the news’ is a strategy that is adopted from traditional stock and forex trading. This strategy refers to trading in response to a particular event or piece of news that has taken place. In traditional markets, news is often scheduled, allowing traders to anticipate a price movement. Scheduled news includes earnings reports and economic updates. trading the news in cryptocurrency markets is a bit more difficult as news and events tend to be more sporadic, however, if timed right it can be an effective strategy.

High-frequency trading (HFT)

High-frequency trading or ‘HFT’ is a method of day trading that uses powerful computers and trading bots that can quickly enter and exit positions over a short period of time. This method is usually employed by quantitative traders (quant traders) as well as investment banks and institutional investors. The system uses a complex algorithm to scan the markets and spot emerging trends in a matter of seconds.

This method of crypto day trading may seem like the easiest option, however, this is far from the truth. HFT is highly complicated and often requires a lot of time and resources to test, monitor and tweak the algorithm.

Crypto Day Trading Signals

Crypto trading signals are indications or recommendations to buy/sell a specific coin at a specific price and time. These trade signals are produced either manually by an experienced trader, or by trading algorithms and bots that deliver the trade signals automatically. Sometimes it could even be a combination of both. Normally, trade signals have been tied to profit-taking and stop-loss-shielding as well. You have to cover your back from all sides.

There are free day trading cryptocurrency signals available to use, but there is no guarantee that these signals will be effective. Some trade signal applications cost money, but these are also not guaranteed to work either.

Going beyond free and paid trading signals are the internal signals used by some of the world’s most successful capital funds. Those funds have highly skilled data scientists who can predict trends based on a number of indicators.

For example, the infamous quant fund Renaissance Technologies hired the data scientist Sandor Straus as the company was starting. Straus helped Renaissance collect information on historic commodities as far back as the 1800s.

About his research at Renaissance, Strauss talked about some of the data patterns that he viewed the markets through:

“Certain recurring trading sequences based on the day of the week. Monday’s price action often followed Friday’s, for example, while Tuesday saw reversions to earlier trends. Laufer also uncovered how the previous day’s trading often can predict the next day’s activity, something he termed the twenty-four-hour effect. The Medallion model began to buy late in the day on a Friday if a clear up-trend existed, for instance, and then sell early Monday, taking advantage of what they called the weekend effect.”

Renaissance Technologies’ understanding of market data has driven the fund into becoming one of the highest returning to date. Unfortunately, all of the trade secrets in the Renaissance Technologies Medallion Fund are almost exclusively only available to the fund’s employees.

In general, investors do anything it takes to get an edge in how the market will move, whether it’s feeding a century and a half of data into a predictive trading model, or using technical indicators to identify chart patterns.

Characteristics of a successful crypto day trader

Successful cryptocurrency day traders have discipline and share several characteristics such as:

  1. Knowledge and experience in the crypto market: Day traders should be both familiar with the market and have a vast knowledge of cryptocurrency behaviours. Successful traders have the ability to know the factors that cause price fluctuations. You should also have experience in forex trading so that you can get a hang of how trading pairs work.
  2. Have sufficient capital: All traders should have risk capital. This refers to the money that you can afford to lose. Moreover, having risk capital can prevent emotional trading.
  3. Have a day trading strategy: Cryptocurrency traders need an investment thesis. trading strategies should give you an edge over the rest of the market. There are several different trading strategies that cryptocurrency day traders use, such as swing scalping, range trading and trading news.
  4. Be disciplined & focused: Even with a profitable strategy, without discipline, you can lose a lot of money. It is important to set strict rules and not to invest out of emotion.
  5. Have multiple news sources: You should be up-to-date with what happens in the crypto and forex market. This will give you insights to use in your day trading strategy.
  6. Access to analytical software: Despite this being an expensive tool for many day traders, this is something that can potentially improve your investment success. Swing traders rely more on analytical software than on news.
  7. Access to a trading desk: As a crypto day trader, you should have simultaneous access to all trading equipment that will help you make swift decisions and act in real-time.

The risk of day trading Bitcoin and cryptocurrency

If done right, day trading can be a highly lucrative activity, however, as with any style of investing, it comes with significant risks. Since dedication and quick execution is required to effectively day trade, it can be highly stressful.

The biggest mistake new day traders make when they first start is not having the appropriate risk management protocols in place. Most new traders are enthusiastic and optimistic about the opportunity to make a profit which can often lead them to overlook crucial risk management steps.

To effectively manage risk, traders should set stop-loss orders on all trades to ensure they don’t lose more than they’re willing to. Additionally, it’s important to set a daily loss limit i.e you stop trading at day if you lose more than 4%.

Common Terminology:

Day Trading: As the name suggests, day trading involves making several to dozens of trades in a single 24-hour trading window. Traders typically base decisions on technical analysis and sophisticated charting systems.

Volatility: This is the amount of fluctuation in the measurement of stability within a security’s price. Volatility is a calculable figure, usually determined by a standard deviation based on a compounded capital return over a given time period. In other words, volatility measures if a stock or cryptocurrency is stable, or if it’s likely to fluctuate, and by how much?

Fiat currency: This is the type of money that has dominated the monetary system for the last few centuries. It is typically a paper currency that is issued and backed by a national government or central bank. However, other examples such as the Tenino Wooden Dollar, a wooden dollar offered by the small town of Tenino in the USA, have deviated from the standard.

Swing Trading: This is a trading method based on identifying advantageous fluctuations called “swings” in the price per trade of securities. Swing trades happen across security classes and may include stocks, commodities, or cryptocurrencies over a given period of time from a few days to a few weeks.

Stop-Loss Order: This is an order to automatically buy or sell a crypto asset once it reaches a specific, predefined price, known as the ‘stop price.’ Once the stop price is reached, a stop-loss order then becomes a market order.

Frequently Asked Questions

How do you conduct a crypto day trade?

Day trading refers to buying Bitcoin and other cryptocurrency assets and then selling them within a 1-day window. Day traders typically base decisions on technical analysis and sophisticated charting systems.

Can I day trade cryptocurrency?

Anyone can day trade cryptocurrency. However, first, you need to dedicate yourself to the right training, education, and discipline before risking any of your money. As we’ve made clear throughout the article, it’s very easy to lose money by day trading cryptocurrencies. While the exact figures are hard to come by, Coin Telegraph estimates 95% of day traders lose money and fail. Forbes estimates that only around 10% of traders are successful with 90% losing some or all of their money.

Patience is very important, and it’s starting to become a rare trait. Yet, even if you are patient, it is extremely unlikely that you predict the market correctly 100% of the time.

Can you make money day trading crypto?

While some sophisticated and/or lucky traders make thousands, if not millions from day trading, other people are not so lucky. In fact, 40% of traders who start to day trade stop after about 1 month, and 80% of traders quit within the first two years. It’s said that between 90% and 95% of people lose money day trading. Oftentimes they stop trading altogether, or they choose a different trading strategy. 

Written by Kurt

Written by Kurt

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