Day trading is one of the most popular trading styles in the cryptocurrency industry and most traditional markets, including foreign exchange (forex) and stocks. However, the traders turn their heads into the cryptocurrency market as it offers one of the most lucrative environments for day traders. With the high volatility and the round the clock availability, digital assets have once proven to be a strategic opportunity for day traders to earn quick profits. Despite that, many buy and hold (HODL) investors in the crypto space, hoping for the cryptocurrency value to appreciate over time. However, on a general note, it is indeed considerably riskier than swing trading.
In the following lines, we’ll discuss all aspects of day trading worthy of attention to help you decide whether this trading style is right for you. Note that day trading has been borrowed from traditional financial markets and has the same principles for crypto trading.
The Key Takeaways
- Understanding the concept and the execution differences between day trading in forex and the cryptocurrency market.
- Deciphers the essential practice in day trading to make logical decisions when trading through strategic market analysis, trading styles, and approaches.
- Taking note of what should and should not do when day trading cryptocurrency to mitigate trading risks.
- Learn how to day trade cryptocurrency through the step-by-step guide with trading tools, bots, and standard practice.
What Is Day Trading in Cryptocurrency?
Day trading is about speculating the asset’s price to generate profits from the short-term move. And the main rule of day trading is to open and close all positions within the same day. In other words, crypto day traders would not hold their positions open overnight.
Based on the definition, you may wonder if buying and selling cryptocurrencies within the same day makes you a day trader. Well, technically yes, but day trading is more than that – it is about the ability to generate consistent profits from the short-term price moves, which is not an easy job. In fact, there is a popular statistic that says that 80% of day traders give up within just two years.
When generalizing in the cryptocurrency context, most crypto day traders would apply multiple tools and use leverage to maximize potential profits. At the same time, the leverage is used to enter positions with hedge or borrowed funds.
The day trading style is quite demanding, as traders have to stay alert whenever positions are open. That is especially true when day trading a cryptocurrency is way more volatile than forex pairs or company stocks. Naturally, that is why you should always set some time aside for day trading, though stop orders/losses can do a great job at automating the main processes.
How Does Day Trading Work in Cryptocurrency?
A day trader has to know the market’s intricacies and the crypto assets he’s trading inside and out. Typically, a day trader’s goal is to buy cryptocurrencies that will likely increase in price within the next hours. Then, sell or open short positions on cryptocurrencies that will likely decline in price. While this might sound easy for a novice, trading is difficult and risky without reliable strategies and discipline.
On a side note, crypto day traders are not focused too much on each position’s profitability. Instead, their goal is to secure profitability from the aggregate positions.
Of course, keeping an eye on the latest news is essential for many day trading strategies. However, most of the traders rely solely on technical analysis. In which, these processes involve chart monitoring to draw conclusions based on particular indicators that help traders visualize historical prices from various perspectives.
The Essentials of Day Trading Cryptocurrency
For day traders, the chart is everything, as it provides traders with the price action, technical indicators, and different timeframes to analyze the market. Many strategies revolve around the price action itself, which can display unique patterns that anticipate specific behavior. Besides the chart, here are other elements that are essential in day trading:
Leverage is used in all margin trading forms, which implies trading cryptocurrency or stocks with borrowed funds. The concept of leverage is difficult to grasp for beginners, but it is imperative to understand it fully.
For example, when trading BTCUSD pairs, traders are allowed to trade with leverage, i.e., opening positions larger than the initial deposit. Imagine when a trader has $1,000 and wants to go long on BTC/USD, which is trading at $19,000 at the time. If the pair goes up to $20,000, that suggests a more than 5% return, which is a $50 profit in this case.
Such a profit is not attractive for most day traders. Instead, they are using leverage, whose size can be set manually. So, if the trader from our example uses 100:1 leverage, the trader would put the same $1,000 at stake to enter a long position worth $10,000, with $9,000 of the funds being technically borrowed. That means the potential profit of a 5% return would be $500, which the difference is relatively big.
However, the broker would never let the funds be at risk, so the trader’s position would get automatically closed when the price goes against him. The higher the leverage, the sooner a losing position is closed.
While leverage is generally not common for spot crypto trading, day traders can still use it when trading crypto derivatives, such as futures and perpetual contracts. Some crypto exchange platforms offer up to 100x to 125x leverage for their perpetual contracts.
Day traders might open and close positions manually, but most of them would deploy stop orders to automate trading and prevent bad decisions driven by emotions. While the take-profit helps traders secure gains before the price retreats to previous levels, the most crucial stop order is the stop loss, which allows traders to limit potential losses.
The stop-loss order can be set for every position at the level chosen by the trader. For example, if a trader goes long on BTC at $19,000, he might decide to set a stop-loss order that would automatically close the position when the price goes below $19,200. If the price starts to decline and goes below $19,200, the trader will end up with a loss, but at least it will be limited.
Stop-loss is one of the most critical risk management tools. It can be ignored by buy and hold traders who have fewer positions that can be monitored and addressed manually. However, day traders should use it consistently to mitigate risks.
You can regard trading as a continuous battle between bulls and bears, who have opposing sentiments on an asset’s price. Thus, the price movement is all about market psychology. The support and resistance levels are the best examples of how market psychology works.
If bulls are strong, the momentum of an uptrend is getting traction, and the price might break above resistance levels with ease. If bears gain traction, the market would retreat and may test new support levels until finding the most reliable one.
The overbought and oversold levels represent another aspect of market psychology. If an uptrend has been around, there is a natural inclination to correct lower, and vice versa.
Understanding how market psychology works will prevent you from trading against the trend.
How to Start Day Trading Cryptocurrency?
Technically, day trading cryptocurrency is not difficult, but things get tricky when your goal is to secure consistent profits. In most cases, traders dedicate much time and effort to improve your skills and react appropriately to various market signals, usually will see a positive result.
Here are the main steps to jump-start your day trading cryptocurrency journey:
- Set aside some funds – you should never borrow to trade or invest more than you can afford to lose. Most financial advisors recommend investing between 10% and 20% of your annual income, depending on your risk profile.
- Find some free room in your schedule – day trading requires a fair amount of time. So, make sure to dedicate at least a few hours per day.
- Trade on a demo account – you should start trading with virtual funds to understand cryptocurrencies’ behavior.
- Choose a crypto trading platform – register a reputable cryptocurrency exchange that provides spot or futures trading services. However, it would be best to start small. Make sure the exchange platform has a well-equipped chart loaded with all types of indicators and features.
- Keep a trading journal! – this step is often ignored by day traders, but it’s imperative to have a trading journal that helps you manage performance, track progress, and learn from mistakes.
Tools and Software for Day Trading
There are many types of tools and software programs designed to help day traders, but you shouldn’t complicate yourself. You can use only the most essential tools required to analyze the price action and improve your trading decisions.
Obviously, you will need a laptop or mobile device with a stable Internet connection. The cryptocurrency exchange or the broker you choose should provide you with charting software that lets you analyze the price and trade without any hassle. Many platforms would use the charting software developed by TradingView, which is convenient, fast, and accurate. Otherwise, seek a trading platform that provides API integration for customization.
Besides this, it is important to keep an eye on the latest cryptocurrency news so that a crypt news aggregator site might do the trick. Alternatively, you can regularly check popular websites like news.Bitcoin, Google News, Coindesk for the latest crypto updates.
Needless to say, a day trader cannot do without technical analysis indicators and tools, which are providing great insight into the historical price data.
The Dos and Don’ts in Day Trading in Cryptocurrency
Day trading strategies in cryptocurrency is a bit different from trading other markets given the much higher volatility. That is why you should be more rigorous about following the best practice. Here are some free tips that will help you increase profitability in the long run:
- Stick to one or a few tested strategies – if you don’t have a clear plan, don’t put your hard-earned money at stake.
- Manage risk – there are a few basic risk management techniques that would help you minimize losses.
- Make sure to have entry and exit rules – the market is moving fast, and you might be unprepared for sudden moves. To avoid this, you can use entry and exit rules that would prevent significant mistakes.
- Don’t stop learning – markets always evolve, especially the crypto industry, which came about a decade ago. Thus, you should learn continually and seek to improve your trading skills.
- Follow the facts, not emotions – make sure your decision-making relies on facts rather than feelings. If you have an excellent trading day today, it doesn’t mean you should increase tomorrow’s stakes and ignore the market signals that don’t fit your expectations.
- Keep a trading journal! – this is one of those invaluable recommendations that have to be repeated again and again.
How to Practice Day Trading?
The best way to practice day trading strategies is to trade with a small amount of money, which doesn’t cause any psychological discomfort. Trading on demo accounts is excellent, but sometimes it can be misleading because knowing that you have virtual funds makes you relaxed. Many traders were doing great on demos but lost their balance right away when trading with real money.
Pattern Day Trading vs. Day Trading
Pattern day trading strategies are a type of trading method in which traders are looking for specific patterns through the price chart in the form of candlesticks patterns or bars. These patterns can anticipate the next move with some accuracy, though you have to learn how they work and understand that there is a risk that the price may behave differently than what you expect.
Some common patterns are the double top, double bottom, head and shoulders, triangles in all varieties, flags and pennants, and more. Some patterns can also anticipate trend reversals, while others may point to trend continuation.
Top Cryptocurrency Day Trading Strategies for Beginners
Below is a list of day trading strategies that have been tested with time and are still relevant in 2020. You can try these strategies one on a demo account or based on past price movements. Here they are:
- Breakout Trading
- Momentum Trading
- Reversal Trading
- Moving Average Crossovers
- Trend Continuation Patterns
- Trend Reversal Patterns
- Trading the RSI Divergence
- Trading the News
- Range Trading
Level: Beginners – Advanced
Breakout strategies revolve around precise signals that happen when a cryptocurrency price breaks above a resistance level or below a support level on the chart, generally with increased volume. Thus, traders would open a long position after the price breaks above resistance and a short position when it drops below support.
If you’re not familiar, the resistance represents an imaginary line made of the recent highs. It forms when the price repeatedly struggles to break above that line as it retreats after touching it. Consequently, the support is an imaginary line consisting of the recent lows. It can show up when the price doesn’t decline below that line repeatedly, as if it was supported by some force.
The point is, if these barriers are broken, the price tends to move in the direction of the breakout.
Level: Beginners – Advanced
Scalping is a trading strategy widely used, especially in forex trading. Scalp traders try to benefit from minimal price movements, which can last minutes or even seconds. Every trade doesn’t bring much profit quantitatively, but scalpers open multiple positions either simultaneously or separately. Their goal is to make sure that all the positions’ aggregative return is positive at the end of any session.
This strategy relies very much on technical analysis, and scalpers are generally not interested in fundamental analysis. The best thing for them is volatility bursts in either direction.
As for the entry and exit points, scalpers can inspire from other strategies and use a combination of technical indicators.
Momentum trading is one of the most common and straightforward strategies, especially among beginners. The condition of this strategy is to open positions based on the strength of the current trend. Thus, momentum traders buy the cryptocurrency when it moves up and sell it when the price is declining. But, providing that the strength of the trend is still supported by high volume.
The rationale behind this behavior is that if there is sufficient strength pushing the price in a given direction, then the chances are that the move will continue for a while. As you would expect, traders exit positions during signals of a trend reversal.
Level: Intermediate – Advanced
Reversal strategies are probably the riskiest ones from this list, so beginners should better look for better alternatives. This trading style tries to catch a trend reversal ideally right before it happens, i.e., before an uptrend turns into a downtrend or vice versa. That means traders are trading against the trend for a while cost them their deposited funds.
To succeed with reversal trading, you have to possess in-depth crypto market knowledge and trading experience. The easiest way to spot a potential reversal is to check whether the price breaks the trend line in the opposite direction.
Level: Beginners – Advanced
Moving average (MA) crossovers represent another group of popular strategies used to get relatively accurate signals pointing to a trend’s beginning. The most straightforward strategy from this category uses two simple moving averages (SMAs) or two exponential moving averages (EMAs) with different periods – a short and a long one. When the short MA crosses the long one from bottom to top, traders regard it as a buy signal. When the short MA breaks below the long MA, traders open short positions.
Level: Beginners – Advanced
An interesting way to follow the trend is to look for candlestick patterns that confirm the trend is about to continue. Some of the most popular trend continuation patterns are ascending and descending triangles, rectangles, flags and pennants, and among others.
Level: Beginners – Advanced
Besides the trend continuation patterns, there are candlestick patterns that usually anticipate a trend reversal. They can provide better signals than merely waiting for the price to break the trend line in the opposite direction, as mentioned above. Some of the most common reversal patterns are double tops and double bottoms (depending on the market condition) and head and shoulders.
Level: Intermediate – Advanced
Another reversal signal comes from the divergence between the price movement of a cryptocurrency and the RSI line. For those unfamiliar, the RSI is an indicator of overbought (above the 70 marks of the indicator) and oversold (below the 30 marks of the RSI) levels.
A bullish divergence occurs during a downtrend when the cryptocurrency price declines, creating lower lows, while the RSI score increases and displays higher lows. That means the downtrend is probably reversing, and an uptrend is coming. Conversely, a bearish divergence forms when the price increases while the RSI indicator drops.
Level: Beginners – Advanced
Trading the news is possible with cryptocurrencies. Many relevant events are happening regularly, including the high-profile partnerships, product launches, token launches and distributions, new technology adoption, regulatory decisions, or integration of crypto solutions by mega-cap companies.
This approach is probably the only day trading strategy that doesn’t rely on technical analysis, though the latter is needed to support the entry points. The conditions of this style are simple. As good news would trigger a bullish sentiment, while the opposite would put pressure on the price of a given cryptocurrency. For example, when Chinese President Xi Jinping praised the use of blockchain and PayPal announced the introduction of crypto services, Bitcoin rallied. In another scenario, Ether’s price soared after the launch of DeFi and yield farming.
Level: Intermediate – Advanced
Range trading is a strategy in which traders determine overbought and oversold levels, which coincide with resistance and support areas, and buy at the oversold area and sell at the overbought zone. This approach is meant to generate decent profits when the price is not trading, i.e., is fluctuating inside a horizontal channel with up and down moves.
How to Decide What to Day Trade?
Day traders spot opportunities through the minute price movements of an asset, including cryptocurrency. To maximize profits, a day trader usually uses leverage to enlarge their capital. So, to make sure a trade is profitable, here are the essentials to augment the opportunities:
Look into the liquidity of trade – to do so, a trader needs to analyze the bid and ask of the exchange, look into the spread, and, ultimately, identify the possibility of slippage.
Assess the volatility of the market – when a market is volatile, it can open up the room for more significant profits, but it also means losses are inevitable. To assess it, you must have great anticipation and focus on the daily price range and be ready to embrace whatever it may come.
Be aware of the trading volume – when the trading volume is high, it indicates an interest in the market, whether it’s stock or crypto. If the stock prices hover up and down, it’s signaling an increase in stock’s volume.
After you know what it’s best for you, you’ll be needing technical analysis to enter and exit the market.
What to Consider Before Day Trading Cryptocurrency
First of all, day trading cryptocurrency is all about capitalizing on the extreme volatility of digital assets. You should be ready for wild price fluctuations. Sometimes, Bitcoin can show a strong correlation to the US stock market or commodities like gold, and other times it moves independently of any traditional asset. You never know what comes next.
Another thing to consider is that whenever you trade an altcoin, you should always check the significant changes in Bitcoin’s price, given that it is still the most dominating cryptocurrency. Plus, it’s the main driver in the crypto market to this day. It’s true that the DeFi boom sparked investors’ interest in a particular group of tokens alone, but keeping an eye on the oldest cryptocurrency here and there is still very helpful to make sure you’re not risking by trading against everyone else.
That being said, you should pick a good day trading strategy and stick to it. You should take day trading seriously if you want to succeed. That’s why you should set aside some money that you can afford to lose and enough time regularly.
As mentioned, technical analysis is a day trader’s right hand, as it plays a crucial role in decision making. Most of the day trading strategies that we’ll share below involve technical analysis to one degree or another.
Thus, it’s essential to have at least some basic knowledge of the most common indicators, such as moving averages, Bollinger Bands, Oscillators (including the Relative Strength Index and Stochastic), Fibonacci levels, and more.
Here’s an overview of what you should know when analyzing the technicalities:
This is most applicable when day trading crypto. It’s used as an overlay fitted into a crypto chart’s price plot. When the market is volatile, the Bollinger bands will diverge while the bands converge when the market is stable. While Bollinger Band generally gives a more holistic perspective, it also indicates the overbought and oversold conditions. And that happens when the market is leaning towards the opposite direction of the bands.
Candlestick patterns (Doji Candlestick)
Above all of the candlestick patterns a crypto day trader can use, a Doji reversal pattern is most applicable. This reversal pattern can be bullish (long for a trader to take) or bearish (short) depending on the previous candle. So, if you notice the last candle is bullish, you can already predict the next one close to the underneath of the body low that triggers a short signal when the Doji lows break. What followed is the trail then stop just slightly above the Doji highs. Hence, when the candlesticks are bearish, everything will be in a reversal.
Trend Analysis (Trendlines and Triangles)
The triangles and trendlines help traders catch a glimpse of the future price movement and the existing trend. However, even with a great extend of triangle formations can’t be applied in all cases. What a triangle pattern does is to showcase the continuation of an existing trend. Through the two converging trendlines as price moves in a lateral direction, traders can spot an opportunity to enter a trade when there’s a subsequent breakout in the direction of the preceding trend.
Some of the frequently used triangle patterns include ascending triangles, depending triangles, and symmetrical triangles. All of which serve the same purpose to help traders forecast appropriate target levels to long and short. Yet each of the approaches differs from one another to help traders understand the market’s communication through price movements.
Relative Strength Index (RSI)
RSI is probably one of the most frequently used indicators when crypto day trading or day trading in general. Traders utilize this momentum-based indicator to find profitable entry and exit prices to maximize profitability.
In most cases, this indicator is used to consolidate the closing price based on the past 14 periods’ setting to average the RSI. Typically, RSI oscillates between 0 to 100. If an asset dips below 30 on the RSI, it naturally translates it as oversold (trading under its actual value). When the RSI soared to 70, it is overbought (trading at premium value).
If you want to know how a strategy works, you can test on historical prices. All you need is a price chart that you can move back and forth chronologically. You can set your technical indicators on it and see if they displayed the past’s desired signals and how accurate the signals were. In this way, you can evaluate your prediction method and improve the trading approach. Note that there are no indicators that predict the future of Bitcoin or stocks, so make sure to manage the risks properly when trading.
How to Start Day Trading Cryptocurrency?
Day trading crypto might be ideal for beginners, as it is one of the most common trading styles and doesn’t require large deposits. If you want to benefit from the crypto price moves, you shouldn’t necessarily buy and sell coins and tokens but rather trade their derivatives, such as futures, including perpetual contracts. This can be done on exchanges that provide an excellent infrastructure for performing technical analysis.
Bybit is one of the best options out there – the exchange offers perpetual contracts, inverse perpetual, and futures with quarterly expiry times. All you have to do is to register and make an initial deposit. Here is a guide on how you can benefit from a day trading cryptocurrency strategy:
- Register for an account on Bybit or your preferred cryptocurrency exchange, including one that provides access to the spot market.
- Think about a cryptocurrency or token that you know best. Bitcoin and Ethereum might be a good start.
- Choose one of the described strategies.
- Test it on the chart by analyzing the history of price movements.
- Deploy the chosen strategy on a demo account.
- Once you feel prepared, start trading with small deposits until you feel confident and comfortable dealing with the pressure.
Learn more on how to trade cryptocurrency here.
Is Day Trading Cryptocurrency Safe?
Day trading is only a method to speculate on the price of a cryptocurrency or any other asset. It is up to you whether this trading style turns profitable or not. The high risk of day trading is a well-known fact, but traders would give it a shot to see whether they can address the risks’ manageable part.
Day Trading Risks Management
Implementing proper risk management techniques can make the difference and turn your trading journey into a full-fledged career. There are many day trading rules related to risk management, but here are the basic ones:
- One percent rule – there is a popular one percent rule that says you should never risk more than 1% of your account on a single trade. This can help you protect your trading capital from significant losses.
- Limit loss size – using stop-losses will help you reduce potential losses. The stop-loss is one of the most critical risk management techniques, and day traders use it regularly.
- Secure profits – another stop order – the take profit – will help you secure a profitable trade by closing a position before a potential trend reversal.
Even if you have a good strategy, it doesn’t mean it will always meet your expectations. Thus, it makes sense to be ready for the worse, even when you think your active positions are doing great.
Best Time to Day Trade Cryptocurrency
Day trading crypto is the best when the liquidity and trading volumes are higher. Unlike the stock markets may have specific hours when the sessions are open, the crypto market is active 24/7. But research tells that around 4 pm UTC is the most active and intense time of day for BTC trading.
On the contrary, the foreign exchange market is more active during the overlap of the US and European trading sessions and is closed on the weekends and major holidays. However, it would make sense to trade when volumes are higher, i.e., during the European and US sessions.
In the end, day trading cryptocurrency indeed is profitable, but only if you have a good grasp with the concept and the execution. What is suitable for you might not be applicable to anyone else. The key is to practice and to test out what strategies suit your trading style the best.
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