Beginner’s guide to day trading crypto

Learn what day trading is, how it works and whether it’s a good way to earn extra income.

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When earning extra income from cryptocurrencies, an investor has a variety of strategies to choose from. The strategy you choose should depend on investment goals: Are you looking for long-term or short-term profits? If short-term profits are your goal, day trading is one strategy that could be considered.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.

What is day trading and how does it work?

Day trading or intraday trading is a short-term strategy that entails entering and exiting trades within the same day.

The term day trading comes from the traditional stock market where traders are only allowed to trade within business hours on business days. However, since the cryptocurrency market is open 24/7, crypto day traders can enter and exit positions every hour of every day. While the flexibility of cryptocurrency markets is an advantage, to be classified as day trading, all positions must be opened and closed within the same 24-hour period.

To be successful, day traders take their time to thoroughly research the market, test strategies and gather as much experience as possible. Typically, day traders rely on technical analysis tools such as volume, chart patterns, price action, and technical indicators to set entry and exit points. They also conduct thorough risk management to mitigate losses.

While technical analysis is the most popular method, other day traders can profit by trading the news. By finding a cryptocurrency asset that has a high volume from a major announcement, a day trader may be able to take advantage of subsequent price swings.

Most day traders generally avoid using true fundamental analysis because fundamentals tend to form useful patterns over longer periods. When trading over a 24-hour period, fundamentals are not as useful.

Profits usually come from volatility within markets and, therefore, liquidity and volume are vital for a crypto day trader. Liquidity is especially important when a trader needs to exit a trade. A high slippage when trading can lead to massive losses. This is why day traders focus on cryptocurrency pairs with high liquidity.

While some crypto day traders tend to confine themselves to one market pair such as BTC/USDT, others will have a long "watch list" to choose from. A watch list is usually based on either technical or fundamental analysis, although some traders will combine both techniques.


Day trading strategies for crypto

While all day trading strategies outlined in this section are possibilities, all trading strategies should be thoroughly researched and tested before being implemented.

High-frequency trading

High-frequency trading (HFT) is a trading system that combines powerful computers with specialised trading strategies to execute trades automatically. Computers apply complicated algorithms to analyse small price changes and discrepancies between asset prices across exchanges.

HFT systems can open and close multiple positions in a second, which means the system can capitalise on short-term gains that would otherwise go unnoticed by the naked eye.

High-frequency trading generally involves the following:

  • The use of co-location services to minimise potential delays and latencies in data flow
  • Avoiding overnight risk
  • Use of complex high-speed programs to generate and execute orders
  • Submission of multiple orders that are cancelled within milliseconds of execution
  • Use of extremely short time frames for opening and liquidating positions

Since high-frequency trading involves the use of computers that host complicated algorithms, only those with the best algorithms reap the benefits of HFT. This means that although this day trading strategy seems appealing, it is only suitable for large institutional investors who have access to the best and fastest algorithms.

While retail traders can benefit from high-frequency trading strategies, it's important to conduct due diligence to ensure that any algorithm being advertised is 100% legitimate. There are many projects that are out to exploit inexperienced traders.

Range trading

Range trading is a trading strategy that involves combining candlestick patterns with support and resistance levels. A range trader looks for price ranges within the crypto market and uses them as the basis for trades.

For example, if a trader establishes that a cryptocurrency pair is trading between a support and resistance level, those levels may create trading opportunities if price remains within the range.

Range traders rely on the assumption that the edges of the range will act as support and resistance until the range is broken. They base trading decisions on the theory that the top of the range will keep pushing the price down while the bottom of the range will keep pushing the price up.

To engage in range trading, a trader must first identify a range to trade. When choosing a range, it is important to ensure that prices have reversed from both support and resistance zones at least twice. By waiting for 2 confirmations, a trader can increase the certainty that a range is forming.

Once a trader has identified a range, traders can then enter positions manually or use limit orders to enter positions whenever the market reaches support or resistance.

After the first 2 confirmations, the more price touches support and resistance levels, the more likely it is those levels will break. For this reason, it is recommended that traders use stop losses at levels where the breakout from the range would be confirmed.

Scalping

Scalping is a day trading strategy that capitalises on extremely small price movements in the market, usually around support and resistance levels. The goal is to continually make small profits throughout the day. These small profits add up to large gains by the end of the day.

As short time frames are involved in scalping strategies, scalpers mostly implement technical analysis to find trading opportunities. While fundamental analysis is not used in day-to-day trading, it can play a big role in selecting the trading pairs that scalpers choose to trade.

With regards to technical analysis, scalpers focus on support and resistance levels, trading volume, candlestick chart patterns, and price action. Some of the most common technical indicators used include Bollinger Bands, moving averages, the Fibonacci retracement tool, relative strength index and volume-weighted average price (VWAP). Scalpers can also implement complex indicators such as real-time order book analysis, open interest, and volume profiles. For more experienced day traders, indicators can be customised to take advantage of changing market conditions.

Scalping is a quick high-risk high reward strategy. All traders must develop and accurately test each strategy before implementation.


How much can I earn with day trading?

How much you earn as a day trader depends on several factors, including your trading strategy, commissions, amount of capital and risk management practices. There are plenty of examples of people making a full-time income with day trading. However, there are also plenty of examples of people losing funds. Those that wish to be successful must be patient and develop a winning strategy slowly. It is not a get rich quick opportunity.

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Is day trading safe?

Day trading can be a lucrative endeavour that can generate significant profits within a short time period. However, it is also an extremely risky activity that sees the majority of day traders lose money.

It requires fast decision-making and quick execution which can be very demanding and stressful. Day trading also requires traders to continually look at a computer screen for a long period so opportunities are not missed.

To succeed in day trading, a trader must take the time to learn the jargon, techniques and systems involved. A well thought out trading strategy must be developed, tested and then executed accurately. All steps must be covered for a trader to succeed.


Verdict

Day trading cryptocurrencies involves executing multiple short-term trades and profiting from small market movements. Typically, traders will close all open positions by the end of each trading day.

This style of trading can be lucrative, but is certainly not for everyone. An investor must consider whether or not day trading suits their personality and investment goals. If you want to take on day trading, you must ask yourself if you are ready to handle the weight and pressure that comes with the task. Only funds that you are happy losing should be used as trading capital.


Pros and cons of crypto day trading

Pros

  • 24/7 market. The crypto market is open 24 hours a day, 7 days a week which allows traders to profit from opportunities all week.
  • High volatility. Cryptocurrencies are a highly volatile asset class. Day trading allows investors to take advantage of these highly volatile movements.
  • Cryptocurrencies are highly unregulated. Unlike the stock market, cryptocurrencies are not heavily regulated which can give traders a lot of freedom. Many users can day trade cryptocurrencies regardless of account size and level of experience.
  • Transparent and open data. Crypto trading data is openly available on most exchanges. Investors do not have to pay fees to access order books or technical data.
  • Can be done anywhere. Traders can begin crypto day trading anywhere in the world. The only requirements are a laptop and an Internet connection.

Cons

  • Cryptocurrencies are highly unregulated. Although this can be an advantage, little regulation in the crypto market can also put you at risk as a trader.
  • News events. The price of cryptocurrencies can rise or fall in seconds when responding to the news. This leads to a high level of unpredictability.
  • Liquidity. The crypto market is still young which means some cryptocurrency pairs lack market liquidity. This can make it difficult to get out of a position at the ideal price.
  • Mastery. It takes time to become a profitable day trader. All new traders will incur significant losses before mastering the techniques.
  • High commissions. Entering and exiting multiple positions in a day can lead to high cumulative commissions.
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Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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