Crypto-day trading refers to the strategy that involves frequent sales and purchases of cryptocurrencies throughout the day to make a profit. Unlike long-term crypto investors who assess an asset’s performance over time, day traders aim to make immediate profits off of fluctuations in price in short periods.
Introducing Crypto Day Trading
Crypto-day trading involves identifying short-term trends with a series of indicators and tools to capitalize on price movements in the span of a short time. The goal is to buy and sell at the correct points to turn a profit at the end of the day. Due to the small size and high volatility of cryptocurrencies, crypto day trading is a high-risk venture.
The term day trading is borrowed from stock markets. Similarly, both aim to capitalize on market acumen: day traders of crypto and stocks alike analyze the price fluctuations by various parameters to identify trends that rapid price fluctuations follow. Unlike day trading stocks, these fluctuations can be fairly steep and yield high returns in crypto day trading due to their highly volatile nature.
How Did It Begin?
Regardless of the form of investment, money invested in cryptocurrencies has risen dramatically from about early 2017 into the next half-decade. The value of major cryptocurrencies, most notably Bitcoin, has reached incredible heights.
The highest-ever boom as of this writing occurred in 2021 where 1 BTC was worth over $65,000. The high value and volatility of cryptocurrencies make them a lucrative source of speculative investments, leading many investors to embrace day trading for quick and high profits.
Day trading has proved to be a double-edged sword, though. The 2021 peak is often attributed to declining real-life conditions; factors like the pandemic, inflation, and low wages are thought to have paved the way for many to find refuge in quick money-making schemes and cryptocurrencies were the greatest opportunity.
While significant wealth was generated especially by young people, cryptocurrencies’ volatile nature is hard to be mastered and requires high-risk tolerance and a solid understanding of market cycles. The investor mistakes that occur due to a lack of market acumen are often referred to as FOMO (fear of missing out) investing where crypto investors make unsubstantiated trading decisions.
Basics of Day Trading
Day training requires a solid and thorough understanding of the market cycles of cryptocurrencies, trading strategies, and indicators, along with key risk management skills and most importantly, capital that a trader can afford to lose. While the delicacies of day trading are vast and not to be simplified, it is possible to list some of the outstanding points for prospective traders.
Popular Strategies
It’s crucial to pick and follow a trading strategy. The most popular include;
Scalping refers to “scalp” in the market for small opportunities. Scalpers typically buy and sell cryptocurrencies over the course of a few hours and capitalize on small price changes. They aim to cash out with small percentage capital gains. Scalping is often the most suitable method for using trading bots.
Arbitrage refers to a strategy where traders buy currency from one exchange and sell in another one, and capitalize on price discrepancies in different platforms.
Range trading involves identifying high and low prices in non-trending markets. Traders identify when a cryptocurrency is oversold or low in value to buy, and when it is oversold and high in value to sell.
Indicators for Identifying Trends
Every strategy has its own set of indicators that work together to realize a pattern. There are a few common indicators used among them.
Direction — Identifying the direction of a trend, upward or downward, is often possible by monitoring the moving average, which helps gauge market sentiment. It shows what the average movers are doing with their digital assets in the long term or short term. If the short-term MA is below the long-term MA, it shows that sellers are more active than buyers. If a short-term MA is above the long-term MA, it indicates that buyers are more active than sellers, for example.
Momentum — Traders also look at how fast and how strong the trend is. Towards the end of a trend, it typically slows down. The relative strength index, reflecting the confidence in the asset, is usually the preferred indicator to understand the momentum.
When RSI is strong, it indicates high confidence in the currency and strong momentum, and vice versa. If RSI diverges from the price rise, it may mean that the buyers were exhausted and sellers may become more active. If RSI converges with a price rise, it may indicate a bullish behavior or sustained downward trend if it pairs with a price decrease.
Choosing Platforms
There is a myriad of cryptocurrency exchanges available, and traders usually opt for more than one. The major things to consider while choosing a platform include,
Listings — Every platform has a different collection of cryptocurrencies. It's wise to know which coins to invest in to identify the platforms that list the desired collection.
Years active — Established platforms like Coinbase or Binance are usually credible and more trustworthy. It's important to assess a platform’s credibility, especially when trading high-value volumes.
Fees — Every platform also imposes its own fee structure and amounts. Some may be more suitable for day trading or varying amounts being traded. Some, for example, encourage high-volume trades by waiving the fees above a certain limit.
Supported cryptos — When deciding which platform to use, being aware of the cryptocurrencies that may be traded in advance can be a useful tool. A smaller exchange with more supported cryptocurrencies and trading pairings may be more useful to day traders interested in altcoins than a larger exchange with fewer alternatives.
User Reviews — One of the greatest ways to decide which exchange to utilize is to visit various crypto communities and read user reviews.
Choosing Assets
Asset liquidity describes the ability to exchange an asset for cash. The price of a cryptocurrency may change from when the trader initiates the trade until it is executed, which is called slippage. This difference may be costly due to the high volatility of cryptocurrencies. Low liquidity can cause slippages, and result in loss.
Volatility refers to the unpredictability of the price and is a necessary evil for day trading. It allows for more opportunities for capital gains throughout the day and is usually higher for altcoins with smaller circulation rather than established coins like Bitcoin.
Trading volume measures the number of trades that occur in a given span of time and is a reflection of the interest in a cryptocurrency. It indicates whether there’s high liquidity or not and whether it can be sold quickly at a higher value than purchased.
Will Day Trading Persist?
Research shows that nearly 40% of day traders quit after one month while 80% quit within the first couple of years, and a staggering 95% lose money.
Day trading in itself is an incredibly high-risk venture and the volatile nature of cryptocurrencies increases the stakes even higher. To get ahead of the curve, traders increasingly rely on programmable trading and making use of trading bots.
A 2019 research estimated that a whopping 86% of all crypto trading was done by bots, which cements the path day trading will follow in the future.
