The Ultimate Guide to Day Trading Cryptocurrency

2021 was a landmark year for cryptocurrency, and 2022 is about to be even bigger.

Kickstarter is building its own blockchain. Square is looking to mine Bitcoin. Even governments are getting into the mix, whether by adding regulatory controls or minting crypto as legit currency. 

At the same time, the Great Resignation is inspiring people to ditch their day jobs and collect wealth through other means—like day trading cryptocurrency. 

You may have heard of day trading in the stock market, but did you know it’s a legitimate practice in the world of crypto? 

This is your guide to day trading cryptocurrency.

What Does Day Trading Mean?

Day trading is an old term plucked from the stock market describing a strategy of entering and exiting the markets on the same day. You know those pictures of all the screaming people in suits on the floor of the stock exchange? Those are day traders. 

Back before computers took over everything, they handled the exchange of stock holdings right there on the floor. Nowadays, they’re more likely to be sitting behind multiple computer monitors, watching the market fluctuate and running algorithms.

The practice of day trading is designed to take advantage of a highly volatile market. The strategy involves maximizing single-day gains based on stock price changes. 

Liquidity is key to trade as quickly as possible. Day traders look to enter and exit within one day: buy, sell, profit. 

What Does Day Trading Mean in the Crypto World? 

If you’re totally new to the idea of cryptocurrency, it may be worth taking a spin around our beginner’s guide to digital tokens to get an idea of how this technology works.

So, now that you’re a bonafide crypto expert, you might be wondering: What does day trading mean in the crypto world?

Well, for one, the ‘day’ in crypto day trading doesn’t actually exist.

The New York Stock Exchange and the NASDAQ are open from 9:30 AM to 4 PM Eastern Time. All trading must happen within that window.

Contrastingly, the crypto market never closes. You can day trade at any hour of any day of any week. Still, the general short-term investing strategy still applies, defying the buy and hold mentality. Remember the Gamestop squeeze? What a time to be alive.

You Don’t Need To Be a Certified Broker To Trade on the Crypto Market

Another distinction between day trading on the stock exchange and day trading in the crypto market is that you don’t need to be a certified broker to trade on the latter. Anyone can get involved in short-term investing, making it more accessible and more volatile.

Remember, volatility is your friend when it comes to day trading. Price movements mean you can deploy strategies that help you see returns within a single day.

What Are the 3 Main Strategies of Day Trading? 

When day trading crypto, you’ll want to consider scalping, range trading, and high-frequency trading. These three approaches to day trading come from the stock exchange, but they have their place in the crypto markets. 

Many brokers will switch up their strategies or employ primary and supplementary strategies. It’s a good idea to know several ways to approach day trading so that you can easily maneuver between them depending on what’s working. 

Day Trading Strategy #1: Scalping

Scalping in day trading is a highly hands-on strategy. People who use scalping as their primary method could be making hundreds of trades a day. That quantity is what makes for a profitable return. Those small profits add up. They’re looking for small price changes. That can mean gaps in liquidity, the bid-ask spread, and other market inefficiencies.

How Does the Scalping Day Trading Strategy Work?

Scalpers buy tickets at face value, then sell them for a little more either online or outside the venue. The broker buys a stock and quickly resells it for a little more.

Scalpers maximize their profit by changing the ticket price depending on demand. A person outside of the venue is likely more in need of the ticket than someone casually looking online. 

Scalpers must designate a strict set of rules to ensure they don’t open themselves up to too much risk. Focusing on small gains makes that a little easier. 

This strategy requires a keen knowledge of the crypto market and a strong sense of how the community talks about certain currencies and tokens. As we all know, it can be hard to predict how or why specific currencies take off or even just have good days. 

Day Trading Strategy #2: Range Trading

Range trading is an elaboration on the set of rules used for scalping. Traders will look for currencies holding steady within a certain range, called support (the low end) and resistance (the high end) levels.

Ranger traders will buy when the cryptocurrency is trending oversold and going for a lower price. They’ll sell when the stock is overbought and going for a higher price. All of these decisions are based on trusting the steady range. A strict rule regarding when to sell and buy is the best way to mitigate risk.

That said, you have to remember these things move fast. These ranges are not built to hold. Most people who employ range trading strategies will have a stop-less rule set up to ensure they exit once the range has been broken. 

How Does the Range Trading Strategy Work?

First, the range itself needs to be decided. This is usually done by tracking prices and noting when one has recovered from a support end and moved back from a resistance end twice. This determines a steady range and not an overall high or low trend.

Once this range is identified, the trader needs to choose at which point they’re going to buy. This can be as simple as buying at the low end and selling at the high end or making use of limit orders to predict a price’s path. 

While selling high and buying low may sound straightforward,  risk comes into play thanks to cryptos’ volatility. It’s rare for prices to truly stay within the assumed range, especially if many traders have flocked to a certain crypto. Traders need to determine buying and selling points that aren’t so tight that they can’t create the risk-reward ratio that makes this method profitable, but also aren’t so wide that they’re beaten to the punch by other traders.

Day Trading Strategy #3: High-Frequency Trading

High-frequency trading is an algorithmic-based trading strategy in which a bot buys and sells large numbers of stocks automatically. These transactions happen in milliseconds.

This bot is coded using complex algorithms that track market conditions. The faster the transaction speed, the more profit for the day trader.

High-frequency trading is different from scalping and range trading, as the latter are led by humans. While these scalping and range trading day traders use a computer to help monitor price changes and set rules for buying and selling, you could do a version of both with just a pen and paper. We don’t recommend it, but you could. 

How Does the High-Frequency Trading Strategy Work?

It may be tempting to think choosing high-frequency trading and passing the work off to a bot sounds easier. However, these algorithms are delicate and require lots of hands-on tweaking to ensure they’re responding to the most accurate market information and movement. 

What these bots are looking for is large institutional trades. When a larger company dumps millions of cryptos, their price temporarily dips. High-frequency traders buy at the moment that price drops, then resell them moments later once the price returns to its previous value. 

The complexity of the system comes in when traders take into account overall stock market trends. Is this dip a momentary fluctuation or a downward trend that’s going to continue? Tracking large amounts of data such as other crypto prices, futures, options, and the like can help these algorithms see the difference between temporary blips and long-lasting plummets in mere moments.

The back work and coding alone on high-frequency trading can make it an impossible task for many. For computer scientists with a tight grasp on the market and the math, it’s a potentially lucrative option.

Is Day Trading Crytpo Risky? 

Day trading on the stock market is risky. Crypto, being so volatile and experimental in form, is even riskier. There is a chance that the value will disappear overnight, and day traders have to be willing to accept that risk. 

Risk also comes from purposeful manipulation of the market — remember GameStop? Individual traders can band together to inflate prices artificially, which can interfere with the carefully plotted strategies outlined above. 

This can be done through tactics like pump and dump and wash-sales. Pump and dump describes a type of fraud in which investors promote a stock they already hold, then sell en masse once they’ve built enough hype to inflate its value. 

Wash-sales, on the other hand, is a tax evasion tactic in which traders will sell a crypto or stock at a loss at the end of the year so they can claim capital losses on their taxes. They’ll then repurchase that crypto or a similar crypto, typically at an even lower rate. This allows traders to invest in the perceived long-term opportunities within these stocks while also maximizing their tax benefits.

When the crypto market is being manipulated, the lack of government regulation and a 24/7 open market can work against you. It’s important that you start small, have a strong understanding of how the market works, and set strict rules for when to buy and sell. 

Thinking About Getting Into Day Trading Crypto? 

Don’t chase the market or double down on a failing strategy. To successfully day trade, experts agree you have to show discipline. 

Deciding whether or not you want to start day trading crypto can be complicated. It requires lots of screen time, patience, and a willingness to lose money to make money. 

Secure and low-risk, it is not. Potentially high-earning and chaotic, it surely is.

Even with all the risk associated, day trading crypto can present a thrilling prospect. The highly volatile market is primed for quick transactions and daily returns for those willing to do the research.

There are many platforms you can use to trade. Coinbase, eToro, Binance, Libertex, and Bionex are some of the most popular ones. 

Where you decide to day trade is as important as the strategies you employ. Read reviews, know the fine print about fees, and get all the details on how the app deposits funds.

Try paper-trading for a little while before you get going on any of these apps. This will help you practice on the actual market without any money involved—vital training that can help prep you for the big leagues. 

Happy trading, folks.

Sources: 

Day Trading: The Basics and How to Get Started Fast | Investopedia

5 strategies to start day trading crypto | Business Insider 

Discipline is Key for Crypto Day Traders, Analyst Says | The Street