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In this day trading cryptocurrency guide, you will learn about what day trading is, how it works and how crypto investors can benefit from it. You will also get to learn about the most popular day trading techniques and how they are executed.
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What is Day Trading?
Day trading is a very popular trading strategy that is used across multiple financial markets, including stocks, forex, cryptocurrency, and commodities.
As the name suggests, day trading is a strategy in which a trader opens a position for not more than 24 hours. They enter and exit the trade on the same day and try to make profits from the small fluctuations in the price.
The term day trader was first introduced in the stock market as the market used to be open only on business days, and traders preferred to close their positions before the end of the day.
It is also referred to as intraday trading, as traders are capitalizing on intraday price moments.
How do Day Traders Make Money?
A successful day trader has a deep understanding of the crypto markets and has good experience with technical analysis (TA). Most day traders rely on technical analysis to create a new trade. The entry and exit points for the position can be determined by analyzing:
- Trading volume
- Chart patterns
- Price action
- Key technical indicators
Risk management is also a crucial part of day trading, and the trader needs to be prepared so that they do not end up losing too much if the trade does not pan out.
Day traders are usually not concerned about the fundamentals of the crypto space. They are aware of the latest happenings in the markets, but they rarely rely on fundamental analysis (FA) to make trades. Fundamental analysis is more suitable for long-term trades and can prove quite beneficial if done right.
However, there are still some day traders out there who rely on fundamental analysis and use the news to their advantage. They usually go after high-volume assets and try to make profits from temporary spikes.
The cryptocurrency markets are highly volatile, and day traders take complete advantage of that. Due to the volatility, day traders have to be cautious about liquidity and volume. If there is not enough liquidity, then the trader would face complications and end up losing funds.
Slippage plays an important role for day traders and can have a great impact on a trader’s trading account. That is why day traders only go for pairs that have high trading volume.
What Are Some Day Trading Strategies?
Scalping is a popular form of day trading, and it involves taking advantage of price movements that happen in small time frames. These small price moments are predictable and happen because of factors like the gap in liquidity, market asks, or other small factors.
The profits in scalping are usually small, which is most scalpers trade with futures contracts or margin trading. This allows them to use leverage so that they can trade more assets than they can afford.
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Scalpers might trade with leverage, but that does not mean they do not do any risk assessment. They still have to consider the factors that affect the price in the short term and tread carefully. Your profits and losses are multiplied when you are margin trading, which is why it has to be done with extreme caution.
You can also read our margin trading guide to learn more about margin trading and how it works.
The techniques used by Scalpers include:
- Volume heat maps
- Order book analysis
- Technical indicators
Scalping requires a lot of knowledge and experience and is not something beginners can execute easily.
Range trading is a very straightforward strategy that relies on candlesticks chart analysis. In this strategy, traders rely on the support and resistance levels of an asset and trade accordingly.
As the name suggests, the entry and exit points for these trades are derived from a specific range. Traders will choose an asset and will determine its support and resistance level. They will then enter the trade when the price is close to the support and exit immediately as soon as it hits resistance level.
For example, if Bitcoin is facing some resistance at $36K and has strong support at $34K, then the trader can enter the trade at $34K and close the position when the price hits $36K. Depending on the market condition, traders can repeat their trades multiple times as well.
The support zones and resistances are calculated with technical analysis, and they hold on well most of the time. Entering a range trade is not as risky because supports and resistance are usually reliable.
Range traders have to be especially careful when the price is touching the price levels too often. When it is consistently testing the level, there is always a high chance of a price breakout.
It is an ideal strategy for new traders who want to learn day trading and reap its benefits. All they have to do is learn the basic candlestick chart patterns and how to identify the support and resistance levels. It may also involve momentum indicators like MACD or RSI.
High-Frequency Trading HFT
HFT is an advanced trading strategy that is used by traders who rely on quantitative data. It involves creating advanced bots that can open and close positions based on data. They usually target short time frames like scalping and are quick to enter or exit a trade.
These time-frames can be as short as milliseconds and can provide a significant advantage to a trading firm. It is mostly implemented on a large scale and is not designed for small traders who deal with smaller margins.
High-frequency trading is highly advanced. It not only requires access to latest technology and tools, but also a deeper understanding of the markets and TA. If you are new to the crypto space, then this is a strategy that you need to steer clear of.
Conclusion: Should I Start Day Trading?
Day trading is an excellent crypto trading strategy that could prove beneficial for you, but it is not for everyone. It is quite demanding and requires fast execution and quick decision-making. You can only make money from this strategy if you have a decent understanding of how the markets work and have enough time for setting up trades.
If you are planning to become a day trader, you must keep in mind that it is a full-time job, and you will have to learn a lot along the way to be successful at it.
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