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Top Day Trading Strategies 

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The growing accessibility of low-fee cryptocurrency trading platforms has unlocked new possibilities for investors. Once upon a time, day trading was exclusive to the wealthy and accredited. However, thanks to cryptocurrency’s low barrier for entry, small minimum trades and 24/7 market hours, day trading has become a viable option for many. 

This article will explore what day trading is, some of the best strategies to utilise and how to mitigate some of its risks. 

What is day trading? 

Day trading refers to buying, selling and exchanging assets within a short-term window. This trading strategy ignores longer-term market trends and attempts to leverage the daily movements of cryptocurrencies to make a profit. Day trading is not commonly attempted by hobbyists or novice investors due to its high level of risk. Most people who day trade earn their income from it and spend significant time on research and strategy development. 

Day traders predominantly mix technical and sentiment analysis to inform their crypto trading decisions. However, day trading requires a couple of market conditions to be profitable. First, the market must have a strong level of liquidity for orders to execute quickly. Additionally, the crypto market must be somewhat volatile for investors to profit off the rise and fall of assets. Therefore, the crypto market’s volatility makes it a popular option for experienced day traders. 

Key Takeaway

The term “day trading” is traditionally linked to the stock market. Exchanges are only open during business hours. Investors can only finalise trades while the market operates, hence the term. In contrast, cryptocurrency markets are available 24/7, which means day trading isn’t specific to making trades in one day. Instead, crypto day trading can be generalised to the exchange of digital currencies within a short timeframe.

What do day traders need to be successful? 

Day trading is one of the more complex investment strategies out there. It relies on timing the market, which in turn requires intricate knowledge of the cryptocurrency market. 

Knowledge of technical analysis 

Technical analysis (TA) uses data and charting tools to identify trends, market momentum and trading opportunities within the cryptocurrency market. Many successful traders have an understanding of how to read charts and use popular TA tools like the RSI, Bollinger Bands, and the Ichimoku Cloud is vital to day traders. Technical analysis can form the backbone of a good day trading strategy. Traders can utilise price action, indicators, and volume to pick out short-term buy and sell opportunities. 

Trading strategy 

Day trading without a well-considered plan is like trying to read a book in the dark. Day traders compete against other day traders who are all trying to create a profit, so using multiple strategies is required. Over time, day traders will find and hone the strategies that work for their unique investment goals. This might include swing trading, high-frequency trading, or arbitrage. 

Risk management strategy 

Day traders must implement plans to help them profit from their investments. However, it’s just as vital that traders have fail-safes to ensure they don’t lose too much from their investments either. Risk management strategies often include setting up stop-losses or take-profit orders. Another popular method is pre-determining and sticking to entry and exit points, regardless of market sentiment or emotion. 

Tip

Greed is one of the biggest pitfalls experienced by novice traders. When a short-term investment makes a bull run, day traders may ignore their strategies and instead try to ride out the highs. Trading based on emotion like this is often a mistake that leads to missed opportunities.

Capital 

Day traders typically need greater capital to work with than amateur, long-term crypto investors. Most day traders are professionals and move a large amount of funds daily. Because traders tend to work with small margins, they need to make higher-volume investments to see a profit. Day traders are also constantly exposed to loss due to the sheer volume of their trades. A higher starting capital is required to recover from bad trades and can help take the emotion out of making (or losing) money. 

Top day trading strategies 

Day trading cryptocurrency without an effective, well-researched strategy is no different to gambling. There are several useful day trading strategies that investors can utilise. Experienced day traders will often combine these strategies to maximise their potential profits. 

Technical analysis  

A technical analysis (TA) trading strategy takes historical information from a cryptocurrency’s performance to predict future price action. TA tools are typically mathematical and help remove the emotion from making or losing money. Plans based on technical analysis usually involve finding a reversal or strengthening trend, and then predicting a viable entry and exit point. 

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The Basics of Crypto Technical Analysis
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15 minutes

Technical analysis is not a foolproof strategy and using tools in isolation can easily lead to false trading signals. Using multiple TA indicators to identify viable buy and sell points is a good idea. 

For example, a day trader can use the relative strength index (RSI) in conjunction with the Moving Average Convergence Divergence (MACD) to assess a shift in a coin’s momentum. If both the MACD and the RSI graphs are rising higher while the price of a cryptocurrency is falling, this is known as a bullish divergence and can signal an entry point for traders. 

Scalping 

Scalping is one of the most popular day trading strategies used by many successful day traders. It involves taking advantage of tiny gaps in the market or minor price moves in a short period. Each trade might only make a small profit, but through the weight of numbers it can accumulate quickly. For example, a day trader might open a position on the price of Bitcoin at $40,000. Then, if the price jumps to $40,200, they sell their BTC and repeat the process with other trades. 

Scalping strategies often profit off price movements of less than a percent. Hence, traders tend to use leverage to trade margins or futures. Utilising leverage helps amplify potential gains, but by the same token, it also amplifies potential losses. Day traders that use leverage must pay strict attention to their risk management strategies. Given the high risk and minute trading windows involved in scalping, only proficient traders with high capital should use the strategy. 

Range trading 

Range trading is an oft-used strategy by day traders due to its simplicity. This plan involves the analysis of candlestick charts to identify support and resistance levels. The logic of range trading is that until support or resistance levels are broken, the price action of a cryptocurrency will remain within a certain range. Therefore, traders can strategise for entering at the bottom of the range (support level) and exiting at the peak (resistance level).  

Arbitrage 

Arbitrage is a financial strategy that has been around forever. It refers to buying an asset on one exchange and selling it on a different platform at a higher price. This strategy is similar to leveraging the bid-ask spread when scalping, except investors will use multiple exchanges. Because there are fees (both exchange and gas) involved in arbitrage, the mathematics to determine if an opportunity is profitable can be complicated. Therefore, day traders often use software to identify arbitrage openings. 

There are quite a few ways day traders can implement an arbitrage strategy. For example, an investor could buy Bitcoin “cheaply” off a high-liquidity exchange and then sell it on a P2P exchange to someone willing to pay a premium to receive the coin quickly.

Did You Know?

The first known use of the term “arbitrage” came from French mathematician Mathieu de la Porte in 1704.  Arbitrage is a very similar strategy to flipping, a concept that has been around since the dawn of civilised society. Buying a dilapidated house, renovating it and then selling it off at a profit is one of the most common examples of flipping.

High-frequency trading (HFT) 

HFT trading (also known as bot trading) is a strategy that relies on developing and implementing an algorithm. A bot then uses this algorithm to enter and exit positions on cryptocurrencies within seconds. Day traders employing an HFT strategy will make thousands of daily trades. Therefore, it requires a substantial amount of capital to get started. 

Bot trading is only recommended to advanced traders, as the strategy involves a lot of technical analysis and algorithm adjustment. It requires a deep understanding of the constantly-evolving cryptocurrency market. 

News and sentiment analysis 

News and sentiment analysis is a common trading strategy used by both beginner and experienced short-term traders. The principles are simple – overall market sentiment and recent news on financial markets can significantly impact the price of cryptocurrencies. By analysing this information, day traders can find opportunities to profit. 

For example, Elon Musk’s tweets are well-known for impacting the price of Bitcoin. In May 2021, Musk shared a post outlining the energy consumption of BTC mining and that his company, Tesla, would no longer accept BTC payments. The price of Bitcoin fell by 17% in the days following, giving day traders a shorting opportunity. 

Risks of day trading 

Day trading is a highly competitive environment that involves spending a lot of money. It is, by nature, incredibly risky. 90% of day traders fail to make any money throughout their trading career, and the failure rate is even worse for day traders utilising leverage. Day trading requires substantial upfront capital, incurs a lot of stress and takes up a lot of time. It is almost impossible to trade crypto in the short term without making it a full-time occupation.

Key Takeaway

Day trading cryptocurrency is particularly dangerous due to the market’s well-documented volatility. While this volatility can make day trading crypto seem appealing, wild price swings can wipe out new day traders within a few minutes.

Using risk management to mitigate the risks of day trading 

Just because day trading is risky doesn’t mean everyone should avoid it. Investors can implement risk management strategies to give themselves the best chance of making a profit.  

Implementing risk management strategies can help ensure emotion is removed from day trading. They will lessen the financial impact of bad trades and avoid common traps like greed and fear. A common example is setting up a stop-loss. 

Things to avoid when day trading  

Trading more than you can afford to lose 

The number one day trading rule is to never spend more than you can afford to lose. Experienced traders should enter the markets assuming they will lose all of their money. Not only will this help prevent a dire financial situation, it can also remove some of the emotion from short-term trading. 

FOMO 

The Fear of Missing Out (FOMO) is a common mistake new crypto traders make. It can often result from social media posting, where another investor (or group of investors) claims a bull run with big profits is about to hit a coin. The new trader becomes scared they will miss out on this opportunity and buy into the cryptocurrency without any strategy or analysis. However, as the bull run was driven by emotion instead of trading fundamentals, the trend quickly reverses. By the end of the run, the investor has lost most of their money. 

The other concern with FOMO is the integrity of those promoting the cryptocurrency. Influencers are often paid by new projects to hype their coins, which artificially inflates their value. Additionally, those with large bags of an asset may begin shilling it to drive up its price before selling. 

Overtrading 

Overtrading is an issue that many day traders will experience throughout their careers. It typically occurs when a trading strategy isn’t well-established, and the investor makes a number of uninformed, small investments in a wide range of assets. Overtrading is common among those new to technical analysis, who often use the indicators for confirmation bias instead of legitimate analysis. 

Not doing enough research 

Day trading is an extremely intricate profession that requires a substantial amount of detailed research. Investors must understand how to read technical indicators, analyse business reports, and develop strategies suited to their risk appetite. Not doing enough research is a surefire way to make bad trades, leading to substantial losses over time. 

Summary 

Day trading cryptocurrency has become a common profession among trading experts due to the market’s high volatility and profit potential. However, day trading is one of the most difficult and riskiest forms of investment. Without appropriate risk management and planning, it is very unlikely a day trader will ever make a profit. Therefore, developing a solid, refined trading strategy and understanding when to use the best day trading strategies is perhaps the most important skill for day traders to learn. 

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