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Day Trading Cryptocurrency: A Comprehensive Guide

2021-09-23

Day Trading Cryptocurrency: A Comprehensive Guide

The unique characteristics of the cryptocurrency market offer a great opportunity to day traders if properly executed. However, it requires that you have a strong understanding of both day trading and the crypto market.

The cryptocurrency market is one of the most volatile and unpredictable markets as prices can instantaneously fluctuate, making it very important that you are well versed in crypto trading strategies before deciding to take up day trading of cryptocurrencies.

So then, you may have a few questions concerning taking up day trading of cryptocurrencies. Is day trading crypto worth it? How does day trading work? What do you need to become a day trader?

Well, you are in luck because this article covers these and many more questions that you might have, whether you are a beginner or a seasoned trader. So, let's get right to it!

What Are Cryptocurrencies?

First off, let us briefly define what cryptocurrency is for those who may not know.

Cryptocurrencies are decentralized digital currencies secured by consensus algorithms, with transaction information stored on a digital ledger. 

Cryptocurrencies, also known as crypto, can be used across the globe without the fear of restriction conflicts. Presently, hundreds if not thousands of cryptocurrencies exist with varying values, which creates an excellent opportunity for day traders.

What Is Day Trading?

Day trading is one of the most commonly used strategies by experienced traders, and it involves going into and exiting market positions on the same day. 

Over several hours or less, day traders buy and sell several financial assets and, in turn, reap profits from speculating on short-term price movements. It is even common for some people to refer to day trading as intraday trading.

Customarily, the term "day trader" is inherent in the stock market, mainly forex and stocks. However, since the advent of the internet and the birth of cryptocurrencies, many have taken up day trading crypto. 

It is important to note that even though day traders enter and exit market positions several times during a single day, the trader makes sure to close all positions at the end of the day.

Common Terms

  1. Fiat Currencies: Centralized currencies minted by central banks on behalf of governments.
  2. Mining: A process of creating new units of digital currencies by confirming transactions.
  3. Token/Coin: The individual unit of a currency.
  4. Block: Confirmed transactions that are bundled together through mining or validation.
  5. Blockchain: A series of blocks organized and linked sequentially distributed ledger.
  6. Altcoin: Non-Bitcoin cryptocurrencies.

How to Get Started With Day Trading Crypto

Now that you are familiar with day trading, what it means, and what it involves, we can move further and learn how to get started with day trading cryptocurrencies. 

First of all, you have to acknowledge that day traders who are successful have a profound knowledge of the market and a reasonable amount of familiarity with trends.

A typical day trader uses technical analysis to draw up trade ideas. Therefore, it is advisable that before you start day trading crypto, you should have a structured approach and a strongly rule-grounded strategy. 

Commonly, many people who take up trading crypto approach the market from the perspective of a gambler rather than taking up an analysis. Using this approach, the chances of failing and losing your money are incredibly high.

As a day trader, the high volatility of the crypto market is your best friend. Because of this, the liquidity and trading volume of the cryptocurrency you choose is critical to the success of your trade. 

Seasoned day traders are known to typically trade highly liquid market pairs (especially in Forex currencies), which is vital mainly when exiting a position.

Before trading any cryptocurrencies, it is essential that you first check how liquid the crypto is. Several crypto exchanges and cryptocurrencies are very illiquid and do not offer instant execution that is characteristic of liquid Forex currencies.

Cryptocurrency charts can be read in the same fashion that a day trader would with any other asset. Day traders use technical analysis, which considers the history of an asset's price and key indicators to predict its future price movement.

Top Strategies for Successful Day Trading

If you ask day traders who are successful in their undertakings how they manage to conduct day trades successfully, they will tell you they have a specific set of trading strategies. What sort of strategies are these, you may ask, well let's move on and discover them!

There  are four major strategies used by crypto day traders that have proven efficient, namely:

  • Range Trading.
  • Scalping.
  • High-frequency Trading (HFT).
  • Arbitrage.

1. Range Trading

As the name states, range traders look for price ranges within the market structure and use this to produce trade concepts grounded on those ranges

It is a relatively simple strategy that involves analysis of candlestick charts and using support and resistance levels to guide trade decisions. For instance, if the price of crypto or stock falls within a support level and a resistance level. 

In this situation, a day trader could buy the crypto at the support level and sell at the resistance level. On the other hand, a day trader could short the resistance level and exit at the support level.

Range trading is rooted in the notion that the edges of the range will hold as support and resistance until the range is broken. This means that the lower edge of the range will likely raise the price, while the upper edge of the range will possibly lower the price.

When using range trading, day traders are usually prepared for the possibility that the market can break out of the range. 

Naturally, this involves setting a stop-loss at a level where the range breakout is established. Once you have identified patterns in the market, it is possible to exploit them to your advantage.

For beginners, range trading is a relatively straightforward strategy when deciding to undertake day trading of crypto. 

What would be essential when day trading is a good understanding of candlestick charts, support and resistance levels, and momentum indicators may also be involved.

2. Scalping

This strategy is widespread among day traders and is highly effective if well utilized. Scalping involves taking advantage of small price movements that take place over short time frames. 

The primary weapon in a scalper's arsenal is taking advantage of increased trading volumes to profit. Seasoned day traders can attest that when using the scalping strategy, they can, on numerous occasions, enter and exit market positions within seconds.

In order to augment their results with maximum leverage, scalpers often trade on margin or trade futures contracts. 

Sometimes, day traders may make the mistake of assuming that because this strategy involves trading with leverage, then principles of risk management do not apply when using scalping. Successful scalpers are conscious of margin requirements and apply appropriate position sizing rules.

Scalping is a day trading strategy that is more suitable for skillful traders because of the characteristic high risk and need for fast trade execution. Conversely, extensively making repeated bad trades could swiftly blow up a good trading account.

3. High-frequency Trading (HFT)

This is a type of trading strategy that involves making use of algorithms. It is often common with quantitative traders. 

In high-frequency trading, a day trader develops algorithms and automated trading bots which quickly enter and exit several market positions over time. For day trading as humans, it gets to a point where fatigue kicks in. 

However, automated trading bots run day and night effectively after receiving the parameters to look out for.

This seems like one of the most straightforward strategies, right? Just set up algorithms and develop an automated bot and let it do the work! 

However, it is not as straightforward as it looks. HFT includes monitoring and tweaking the algorithms to keep up with the rapidly evolving market conditions.

Large trading firms mainly use high-frequency trading, and it is quite an exclusive industry. 

Because this strategy is more commonly used by successful trading and hedge funds, high-quality information concerning the market is hard to come by, especially for individual investors and the general public.

This strategy is more suitable for advanced traders since developing efficient HFT bots requires a substantial grasp of advanced market concepts and ICT and mathematics. 

And yes, of course, there are HFT bots for sale, but have you considered why someone would sell a profitable trading bot rather than use it themselves?

4. Arbitrage

This strategy involves purchasing cryptocurrencies from one market and selling them to another market at a higher price.

The discrepancy in the buying price and selling price is referred to as “spread” in trading. Because the crypto market is generally unregulated, it allows anyone to create an exchange. 

This is one of the reasons why significant differences in the spread of crypto exist and differences in asset liquidity and trading volume.

Traders in the cryptocurrency market often hold a portfolio on an exchange that they are trading. You can check out this compilation of some of the best crypto portfolio management tracker platforms

Suppose you decide to take up this strategy. It is advisable to open accounts on exchanges that you believe will exhibit significantly different prices for the same asset within different markets.

For instance, during the "kimchi premium"—when Bitcoin traded at a 40% higher price in South Korea than in the U.S.—traders profited from purchasing Bitcoins from U.S. exchanges and immediately selling on South Korean exchanges. Astonishingly, it has happened on more than one occasion.

For this strategy, even though it is largely straightforward, it would require that you are well-versed in crypto market concepts and are up to date on discrepancies in the market prices as well.

Top Cryptocurrencies to Day Trade

The crypto market is virtually flooded with thousands of cryptocurrencies, and this is forecasted to continue rising as many more people take up crypto while slowly moving from fiat currencies (government legal tenders). 

This proliferation offers an excellent opportunity for day traders who take up day trading crypto. This then brings up the question, what are the best cryptocurrencies to day trade?

Tether (USDT)

Tether is considered one of the best cryptocurrencies for many reasons. First of all, USDT has one of the highest 24-hour trading volumes among crypto, making it an integral part of the crypto market. 

Also, Tether is considered one of the most stable coins because of minimal price fluctuations. This increases the confidence for potential buyers that immediate losses from sudden price drops are not expected.

Bitcoin (BTC)

This is the most popular cryptocurrency and is also the oldest crypto. Because of its high adoption globally and consequent high demand and value, day trading Bitcoin is a desirable investment.

Bitcoin's characteristic nature is what makes it the most preferred and, at the same time, the most traded crypto. Moreover, there are currently around three million available bitcoins for mining out of 21 million, making Bitcoin an asset in the trading world.

Ethereum (ETH)

Second, only to bitcoin, Ethereum is another massive cryptocurrency, and it has amassed an enormous following of both investors and traders. 

Ethereum's high popularity and adoption by millions because, in addition to being a cryptocurrency, it is also a blockchain platform. Ethereum's blockchain allows investors to integrate intelligent contract protocols into its blockchain.

As stated earlier, crypto day traders exploit the high volatility of assets to maximize profits when trading. Ethereum shows a high level of volatility which is suitable for making profits within short durations. In addition, Ethereum is listed on multiple exchanges, which makes it relatively easy to trade in the same.

Tron (TRX)

As a cryptocurrency, Tron has grown significantly in the last couple of years. It was initially created as a platform to clear all limitations on the web. For day traders, the high volatility inherent in Tron makes it perhaps the most usable digital currency in the market. TRX also has incentives tied to it, which makes it very exciting for every trade made.

Ripple (XRP)

Ripple is considered the third-largest crypto globally, and it is highly preferred by banking and financial institutions. Ripple holds excellent potential for future investments, and according to reports, it elicits a high return on investments (ROI). Ripple is commonly used as an intermediary for fast-tracked transaction-processing time and cross-border collaborations.

Lite Coin (LTC)

This is the first open-source person-to-person Altcoin globally that has maintained its positional stability by capitalizing on the market. Lite coin is a branch of Bitcoin and is speculated to be the seventh-largest cryptocurrency worldwide. 

The widespread use and popularity allow for almost zero instant rate disbursement to individuals globally. The majority of those who prefer Lite coin point out that its great storage capacity and fast transaction confirmation time is the reason.

Binance Coin (BNB)

As one of the world's leading crypto exchanges, Binance launched their very own cryptocurrency known as Binance Coin. 

It has quickly gained popularity in the crypto market and exhibits great promise since a reputable exchange owns it. 

BNB has quickly grown in demand and liquidity likewise and is even rated among the top 10 cryptocurrencies globally by market cap and high liquidity. This makes it highly appealing to crypto day traders, and it usually is ideal crypto to start day trading with.

EOS

As mentioned earlier, for day traders, the high volatility of crypto is what makes it exceedingly appealing for day trade. EOS has over the years reached incredible price highs multiple times and is therefore very volatile. 

This high level of volatility earns EOS a mention among other cryptocurrencies as suitable for day trading.

So, in summary, what do you look for when picking a cryptocurrency for day trading:

  1. Liquidity.
  2. Volatility.
  3. Trading Volume.
  4. For beginners, stable coins are preferred.

Essential Tools for Crypto Day Trading

There are several tools in the market, and as a result, it may be advisable to experiment with different tools until you discover what fits your specific needs and trading style

Exploring the various tools can be the difference between discovering a hidden treasure that could boost your portfolio or falling victim to buying exaggeratedly priced cryptocurrencies.

Select a Good Exchange

When deciding on a specific exchange to use for day trading cryptocurrencies then there are a few things that you need to factor in, namely:

  •  Liquidity - The ease of buying and selling assets. An exchange with high liquidity is preferable to one with lower liquidity.
  • Security - The security of exchange allows you as a trader to be at peace and trust that your funds are safe. On several occasions, exchanges have been victims of hacking, and millions siphoned from them. So you must choose an exchange that assures you of high safety of your funds.
  • Fees - Seasoned traders who have been in the trading arena will inform you that there are usually fees paid to exchanges. These fees should always be included in the profits when trading. Therefore, a cheap exchange is preferred to more expensive ones.

Use Decentralized Exchanges (As an Alternative or Supplement)

A decentralized exchange works similarly in every aspect to centralized exchanges (mentioned above) except that the technical infrastructure is decentralized. 

The main advantage that decentralized exchanges hold is that they allow users to keep their funds secure in their wallets rather than deposit them in exchanges

Even though this looks pretty enticing for day traders, decentralized exchanges are usually more challenging to use, and at the same time, they have less liquidity.

When picking a decentralized exchange to use, ensure that the exchange has:

  • A decent number of users.
  • Fast transaction speeds.
  • As few trading pairs as possible.
  • User-friendly interface.
  • Scalability.
  • Affordability.

Explore and Use Trading Platforms

This is one of the best tools that every trader should add to their arsenal. Trading platforms streamline crypto trading by allowing trade on multiple exchanges from a single platform rather than having multiple windows open to trade in several exchanges

You can have a look at some of the best crypto trading software platforms and decide which one best suits you.

Utilize Charting and Technical Analysis Tools

These help you visualize various trading indicators and draw trend lines which help in market visualization.

As a trader, especially a day trader, it is imperative that you practice with these trading indicators and trend lines as you steadily grow your technical analysis skills. Once you master this, it is assured that you will have the upper hand over other traders. 

Technical Analysis as a market skill is one of the greatest assets that a day trader can hold. There are several charting and technical analysis software today, and these are some of the best that you can choose from.

Have Up-to-Date Market Data

Market data is one tool that separates profitable traders/investors from the rest. As a day trader, the success of your trades heavily depends on having accurate and near real-time information concerning the market round the clock. 

The market data should be with no error for it to be helpful to you as a day trader. It is therefore critical that you get a platform that offers reliable and accurate information concerning the market.

Have a Reliable Crypto Wallet

In the world of cryptocurrencies, wallets are like your bank. The fact that crypto is a digital currency, hackers often target them. Because of this, you must have a reliable and secure crypto wallet. Also, a well-developed crypto wallet offers ease of use and interaction in the user interface.

This list is far from exhausting, but it covers some of the essential tools that will help you succeed as a day trader in the crypto market.

General Tips for Successful Crypto Day Trading

As lucrative as the idea of day trading crypto may seem, some small portions of advice may go a long way in improving your endeavors.

Ease into It

It doesn't matter how confident you are about your capabilities and skills in day trading cryptocurrencies; it is prudent to take baby steps. 

Do not dive right in headfirst but rather progressively ease into the process. The crypto market has a vast potential for great returns, but at the same time, it is unpredictable and can result in massive losses.

As a day trader, especially for beginners, you should start slowly with small trades and then progress steadily into more prominent and higher staking trades. A proper understanding of the market is essential to avoid making rookie mistakes when undertaking trades. 

When day trading, especially cryptocurrencies, overconfidence is your worst enemy. This is mainly because of the unpredictable nature and high volatility characteristic of the crypto market.

It is an easy, three-step process:

  1. Start slowly (don’t punch above your weight).
  2. Increase your market understanding and learn patterns that work for you.
  3. Progress upward steadily and take up more challenges.

Learn, Learn, Learn

For successful day trading, you must educate yourself as much as possible on cryptocurrencies and the crypto market. The high proliferation of cryptocurrencies and variations in use make them significantly different from trading in the stock and Forex markets. 

With every new day comes something new in the crypto market, and therefore, you need to be constantly up to date and learning the new trends.

A tremendous amount of this education comes not only from reading but rather from the trading process itself. Nothing beats the hands-on experience and the lessons drawn from undertaking actual trading activities

Alternatively, you can also consult professional advisors concerning pressing questions that you might have.

Avoid Huge Risks

Experienced day traders will tell you that you should never risk more capital than you can afford to lose when day trading crypto. This is especially true when trading with leverage because even though there is a potential for high returns from small investments, massive losses are also possible.

Experts advise that when assessing trading opportunities, a day trader should spread capital across many trades and reduce the risk if a single trade goes south. 

By practicing the 1% rule—which states that no more than 1% of a trader's capital should be risked on a single trade—you will be able to avert the financial stress of losing your funds in a transaction.

Frequently Asked Questions

Is Crypto Day Trading Profitable, and Can I Make a Living from It?

The answer is yes, especially when executed correctly; day trading cryptocurrencies is a profitable venture. The high volatility of crypto and the sheer number of currencies provide an excellent opportunity for making profits from day trading crypto. 

Successful crypto day traders make up to $500 a day, but this requires a lot of practice and a chunk of experience. Do not think that you will succeed immediately!

Why Do Most Day Traders Fail?

Several factors might cause the downfall of a day trader, but the most common is the "get rich quick mentality." Several people take up day trading (especially crypto day trading) while assuming that profits will be instant. 

It is vital that before starting day trading, an individual should get adequate information about the crypto market and its nature. The crypto market can offer tremendous gains but, at the same time, also significant losses. 

Do not jump right into the deep end before polishing up your swimming skills. Start with small trades before taking up larger and riskier ones.

Final Views

By this point, you are equipped with enough knowledge to start crypto day trading on your own and make some cash from it. 

Day trading crypto offers a great potential to reap massive profits from the growing crypto market, but it needs to be executed properly. 

It is also an excellent way to grow your crypto portfolio. So now that you are well informed, take advantage of the opportunity to start this journey of crypto day trading!

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