Day trading means buying and selling financial assets within the same day with the expectation to make profits from the short term volatility of the market. Volatility refers to the ability of an asset to go up or down in value.
This is how it works:
Day trading cryptocurrency is a game of hits and misses. You invest in assets throughout the day based on your research. If your study is strong enough, you have a better chance of making profits by selling them sometime during the day.
Since cryptocurrencies are a very volatile asset class, they attract a lot of day traders. Day trading cryptocurrency is lucrative because of the possible opportunities to make good profits. However, volatility can be a trader’s best friend and their worst enemy. While it creates a chance to make profits when the price goes up, it also puts you at risk if the prices go down.
3 Popular Day Trading Strategies
Day trading could be comparatively risky as it requires you to profit in a single day. Hence it’s important to learn strategies that can help you effectively day trade crypto before you start day trading cryptocurrency.
Three popular crypto day trading strategies:
Scalping involves profiting from the small intraday movements of an asset. The trading period is remarkably brief, say from a few seconds to a few minutes. Since the trading period is too short and price movements are minor, traders conduct numerous trades and in large volumes to make considerable gains.
E.g. Let’s say you bought 100 Tron tokens worth ₹400 for ₹4 each. After 10 minutes or an hour, Tron’s value turns to ₹4.20. You would sell your holdings at ₹420 and make an instant profit of ₹20.
This trading strategy enables you to benefit from the regular price variation of the market. The more capital you risk, the bigger your profit could be. Referring to the same example as above, If you had put ₹4000 to buy 1000 Tron tokens, your profit would be ₹200.
It is one of the simplest strategies in trading; however, try not to get carried away and risk excess capital. It is one of the most widely used strategies to day trade crypto.
Investing all your money into trading could lead to losses. Also, while selecting the cryptocurrencies to trade in, it would be best to choose the ones that can be easily bought and sold in the market (highly liquid). You can determine the liquidity of a cryptocurrency by looking at the order books. If the difference between their buy and sell price is slim, the cryptocurrency is liquid and vice versa.
2. Range Trading
It is a trading strategy where traders trade within a trading range (price range) with a support and resistance level.
- A trading range is the price movement of an asset between a support and resistance level for a period of time.
- A support level is the lowest price in the range. It is the price beyond which the sellers couldn’t push down the cryptocurrency further. Generally, a new uptrend starts after an asset hits a support level.
- A resistance level is the highest price of the range. It is the price point after which the sellers couldn’t further drive the price up. Generally, a downtrend is expected after the asset hits a resistance level.
Range traders usually try to buy at support levels and sell at resistance levels to make profits.
For instance: The graph below shows that the asset’s price has stayed within a price range between 29th July and 2nd Aug. Day traders can identify such ranges and make their trades depending on where in the range they have entered the market.
This strategy assumes that the cryptocurrency’s price will always remain between the support (lowest price of the range) and resistance (highest price of the range) levels until the range is broken.
The more times the price touches the highest and lowest points, the likely it is that the range will break. Hence, traders should always prepare for the chance to break out or break down the range.
P.S: The graph is used just to give you an idea of what a range looks like on the charts, it’s not a cryptocurrency chart.
3. High-Frequency Trading (HFT)
High-frequency trading, as the name suggests, is “ high frequency (speed) trading”.
This strategy requires you to develop algorithms and trading bots to enter and exit multiple positions. Since we use algorithms and trading bots, the trades happen in milliseconds.
These algorithms are designed to spot opportunities in the market at a much faster speed than a human. They can help traders make profitable trades. However, this strategy is too complex to implement. It takes a lot of time, effort and expertise to create and train these bots.
It is an advanced strategy, specifically used by trading firms to day trade crypto.
Things to Know Before You Start Day Trading
Before you jump right in and start day trading; here are a few things you should know:
1.Understand the Market Inside Out
Learn the market; understanding how the cryptocurrency market works and how the trends of the industry influence the price will help you trade better. You also need to understand how volatility works. It will help you recognise the price movements.
Keep a close watch on the events happening in the crypto space; they also influence the short term price movements of the asset and impact traders.
2. Set Goals and Limits
Setting goals and limits push you to make every trade count and stops you from getting carried away.
Decide your trading capital; this should be the money that will not affect your lifestyle even if it’s lost. Day trading isn’t easy, and expecting to be good at it from day one is too optimistic. Set ‘realistic’ profit goals and actively work towards them. Put a limit on your losses; Most traders risk only 1% of their total trading capital for each trade.
3. Order Types Are Your Friends
Order types like limit order and stop-loss order can be beneficial for traders. They allow you to decide at what price you want to buy or sell your cryptocurrencies.
2 Popular trading order types:
- Limit Order: A buy limit order is used to execute the buy order at the set limit price or lower. Whereas a sell limit order is an order to execute the sell order at the set limit price or higher. A limit order can help you buy or sell at your preferred price.
- Stop Loss Order: A stop order, also referred to as a stop-loss order, is an order to buy or sell a cryptocurrency once its price reaches the specified price. For instance, let’s assume you bought 1 TRX for ₹4; by using a stop-loss order, you can trigger a sell if the asset falls beyond your risk tolerance limit, which could be ₹3.50.
4.Pick Your Cryptocurrencies
This is one of the most crucial steps before you begin trading. This dictates whether you will make profits or losses and how much. Be strategic while picking your day trading cryptocurrency.
Volatility, Volume, and the Current activities of a cryptocurrency play an important role in determining the best crypto for day trading. We have covered how to find the best crypto for day trading and the list of some of the best day trading cryptocurrencies in an extensive guide if you are interested to know more.
Trading could be exciting for crypto enthusiasts who like to follow the moves of the market and enjoy breaking them down.
If you find day trading exciting, learn and practice the above strategies and keep learning new ones. Watch this space for more trading gyan!
P.S: KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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