With the bear market being experienced by traders in the crypto space today, you’re likely wondering how you can leverage different trading tools and practices in order to squeeze some profits. If you’re like the rest of us, then you’ve been treated to a crash course in crypto volatility and you might be thinking about how to stabilize your portfolio by minimizing exposure and risk.
Whatever your trading goals or the underlying rationale of your trading strategy, you’ve likely come across the term “crypto day trading.”
In this article, we’ll be discussing crypto day trading, what it is, how it works and whether it is worthy of your time and investment.
Defining Crypto Day Trading
Day trading is a set of techniques used to take advantage of short-term changes in the prices of a commodity. As the name implies, the goal of a day trader is to end any given trading day with their holdings having a higher value than they started with.
Crypto day trading is no different. However, crypto day trading is an even higher-risk, high reward activity. With an effective trading strategy, you can be on your way to crypto riches in no time! But you first need to understand in-depth how to day trade crypto so you don’t make unnecessary losses.
This trading strategy aims to profit from small movements in market volatility; this is why it is an intense activity with more frequent trades than other trading strategies. The reward can be very attractive in a crypto market, more than day trading stocks or commodities, as it’s not uncommon to catch a crypto asset spiking by a high percentage within the same day.
Crypto Day Trading Strategies
The main difference between trading and gambling is a proven and effective strategy. These strategies can be the difference between one or two lucky streaks and consistent long-term returns. You can use different trading strategies in specific situations, depending on the nature of the market and your competencies. Ultimately, it will be all up to you to understand the market and decide when it is appropriate to apply a specific strategy.
Below are some of the trading strategies used by investors when day trading.
- Algorithmic trading
Building profitable algorithmic trading bots, which can be used for day trading, is actually a lot simpler than most assume. State-of-the-art technology such as an in-browser Python code editor can be used efficiently and effectively to create a trading strategy tailored for intraday trading. Even traders who lack experience or interest in coding can take advantage of drag-and-drop options to create automated crypto trading bots based on a range of indicators and strategies.
- Scalping
Scalping involves attempting to achieve profits based on short time intervals (often the shortest intervals possible). The result is hundreds, if not thousands, of trades within the span of one day. As such, scalping is considered a type of day or intraday trading and it can involve technical analysis. The accumulation of small profits made from scalping can be used to offset larger losses elsewhere in a trader’s portfolio.
- Arbitrage
Arbitrage trading involves purchasing assets on one exchange and then selling them on a different exchange. The goal here is to take advantage of price discrepancies across exchanges in order to make a profit. However, investors need to be aware of high deposit and withdrawal fees and a lack of volume, among other things.
- High-frequency trading (HFT)
One of the rationales behind high-frequency trading was to introduce liquidity into the stock market following the Lehman Brothers debacle back in 2008. As you might have guessed, however, HFT is not the domain of individual traders, but rather institutions with powerful computer programs to execute large trading orders in a fraction of a second. Sure, it’s day trading, but only done by the big boys (and girls).
- News-based trading
If you’re a quick-witted trader who also happens to be a news junkie, scouring the best crypto podcasts as well as the best crypto news websites, then you might be drawn to news-based trading. Whether good news (BTC is up) or bad news (BTC is down), the news can be profitable. In addition to these one-off news events, traders will often day trade by timing their trades to coincide with an anticipated upgrade, announcement, merger, or report.
Pros and Cons of Crypto Day Trading
Like typical day jobs, learning to trade crypto requires time and effort; however, this can be a fulfilling endeavor as this allows you to become your own boss. Here are the benefits and drawbacks of crypto day trading.
Pros
- Investors can set their own goals and work at their own pace;
- There’s no overnight risk, which is real, especially in stock and commodity trading;
- Potentially big profits and ideal conditions for leverage positions;
- The possibility to get good returns even in bear markets;
- Faster returns on investments;
- Disciplined and experienced traders can allocate little daytime and be profitable with only a few trades, early in the morning, for instance, and have the rest of the day free; and
- The learning curve can be infinite since there’s much to learn in technical and fundamental analysis for the curious and inquiring mind.
Cons
- Day trading asset allocation can be too high. Investment rule number one should apply to day trading, too: never risk money you can’t afford to lose;
- Self-discipline can be tough to implement;
- Day trading can be very rewarding but can also lead to significant losses;
- Constant attention to the market. Facing a screen for long hours can be alienating and time-intensive. Stop-losses can be helpful but are not viable solutions in the long run;
- Stress is a potential component and threat of day trading due to the high risks involved in volatile crypto markets; and
- Tax compliance can be burdensome as day trading requires keeping an accurate record of all transactions. Investors must, therefore, also be their own accountants, which can be very time-consuming.
Final Thoughts
Ultimately, crypto day trading is highly profitable. Day traders apply multiple trading strategies to take advantage of the crypto market discrepancies. However, the success of crypto day trading is not only limited to learning trading discipline and utilizing the appropriate strategy — choosing the right crypto exchange is the best strategy.
