Day trading is one of the most commonly used trading strategies. Day traders are active in most financial markets, such as stocks, forex, commodities, and of course, cryptocurrency markets. But is day trading cryptocurrency a good idea for you? How do day traders make money? Should you start day trading?
Unfortunately, we don’t have a single answer to those questions, but this article will explain what you need to know before you start day trading crypto.
Day trading is a trading strategy that involves entering and exiting positions on the same trading day. Since the trading happens within the same day, this strategy may also be referred to as intraday trading. The goal of day traders is to use intraday trading strategies to try and profit off of price changes in a financial instrument.
The term « day trader » originates from the stock market, where trading is open only during business days of the week. In this context, day traders never leave positions open overnight since they aim to capitalize on intraday price movements.
Successful day traders will have a deep understanding of the market and a good chunk of experience. Day traders will typically use technical analysis (TA) to create trade ideas. They will usually use volume, price action, chart patterns, and technical indicators to identify entry and exit points for trades. As with any trading strategy, risk management is essential for success in day trading.
As fundamental events may take a long time to play out, day traders may not concern themselves with fundamental analysis (FA). Even so, there are some day traders that base their strategy around « trading the news. » This involves finding assets with high volume thanks to a recent announcement or piece of news and taking advantage of the temporary spike in trading activity.
Day traders aim to profit off of market volatility. As such, volume and liquidity are crucial for day trading. After all, day traders need good liquidity to execute quick trades. This is especially true when it comes to exiting a position. A large slippage on just one trade can have a devastating impact on a day trader’s trading account. This is why day traders will typically trade highly liquid market pairs.
Some day traders will only trade one market pair, such as BTC/USDT. Others will create a watchlist based on technical or fundamental attributes (or both) and choose what instrument to trade from that list.
Scalping is a very common trading strategy among day traders. It involves taking advantage of small price moves that happen on short time frames. These can be gaps in liquidity, the bid-ask spread, and other market inefficiencies.
Scalpers will often trade on margin or trade futures contracts to amplify their results with leverage. Since the percentage price targets tend to be smaller, larger position sizes make more sense. In fact, this is generally true for most day trading strategies.
However, trading with leverage doesn’t mean that risk management principles go out the window. A successful scalper will be aware of margin requirements and apply proper position sizing rules. If you’d like to read about a simple formula for position sizing, check out How to Calculate Position Size in Trading.
Scalpers may use strategies such as order book analysis, volume heatmaps, and many technical indicators to define their entry and exit points for individual trades. However, due to the fast trade execution and high risk, scalping is generally more suitable for skillful traders. In addition, due to the extensive use of leverage, a few bad trades can quickly blow up a trading account.
Range trading is a simple strategy that heavily involves candlestick chart analysis and looking at support and resistance levels. As the name suggests, range traders look for price ranges within the market structure and create trade ideas based on those ranges. For example, if the price is ranging between a support and resistance level, a range trader could buy the support level and sell the resistance level. Conversely, they could short the resistance level and exit at the support level.
The idea of range trading is based on the assumption 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 push the price up, while the upper edge of the range will likely push the price down.
However, the more time the price touches a support or resistance level, the more likely it is that the level will break. This is why range traders will always prepare for the chance that the market can break out of the range. Typically, this means setting a stop-loss at a level where the breakout from the range is confirmed.
If you’d like to read more about this topic, check out The Basics of Support and Resistance Explained.
Range trading is a relatively straightforward strategy that can be suitable for beginners. It requires a good understanding of candlestick charts, support and resistance levels, and may involve momentum indicators such as the RSI or MACD.
High-frequency trading (HFT)
High-frequency trading is a type of algorithmic trading strategy typically used by quantitative traders (« quant » traders). It involves developing algorithms and trading bots that can quickly enter and exit many positions over a short amount of time. How short are these time frames? Think milliseconds. A few milliseconds of advantage for a high-frequency trading firm may provide a significant lead over other firms.
HFT algorithms may be created to implement highly complex strategies. While high-frequency trading may look like a tempting day trading strategy, it’s much more complicated than it may seem. High-frequency trading includes a lot of backtesting, monitoring, and tweaking algorithms to adapt to ever-changing market conditions. So, if you think you can just sit back while a trading bot does all the work for you, that’s probably far from the truth.
Another thing to consider is that high-frequency trading is quite an exclusive industry. As such, high-quality information is hard to come by for the general public. Why is that? Well, it’s quite simple. If successful trading firms and hedge funds started sharing their high-frequency trading strategies with individual investors, those strategies wouldn’t work anymore.
Also, there is an additional point you should consider when it comes to trading bots. If someone has built a profitable trading bot, why don’t they just use it instead of selling it? This is why you need to be especially careful when thinking of purchasing a high-frequency trading bot.
Developing HFT bots requires an understanding of advanced market concepts alongside an acute knowledge of mathematics and computer science. As such, it’s more suitable for advanced traders.
So, you’ve decided you’d like to try out day trading cryptocurrency. Where should you start?
You could check out A Complete Guide to Cryptocurrency Trading for Beginners, where we explain everything you need to know about trading, along with some tips for retail investors. If you’re comfortable with the basic concepts, you could then do paper trading on the Binance Futures testnet. This way, you can test your trading system first without risking real money.
But which is the best online trading platform for day trading cryptocurrency? Well, we can’t decide for you, but the Binance ecosystem offers hundreds of market pairs, margin trading, quarterly and perpetual futures, leveraged tokens, real-time market data, and much more. Just go to Binance, convert your fiat currency to cryptocurrency, and get started right away.
Day trading can be a highly profitable strategy, but there are a few things to consider before starting. Since day trading requires fast decision-making and quick execution, it can be highly stressful and very demanding. Day trading can also be quite risky and requires a solid understanding of the market. Naturally, it will also require you to look at screens for extended periods.
Are you able to handle all this weight on your shoulders while potentially losing money? You’ll have to carefully consider if day trading suits your individual investment goals and personality style.
If you’re unsure whether day trading is the right strategy for you, check out A Beginner’s Guide to Cryptocurrency Trading Strategies. In that article, we explain many different strategies that can be suitable for active traders, for example, swing trading. Getting familiar with these strategies can help you make a better choice when trying to find your trading style.
Day trading is a commonly used trading strategy in stock trading just as well in cryptocurrency. Day traders use intraday trading strategies to try and profit from market volatility, and will typically not stay in positions for more than one day.
Day traders use technical analysis, chart patterns, and technical indicators to identify trade setups. Some of the most common day trading strategies include scalping, range trading, and high-frequency trading.