Day Trading Cryptocurrency Guide - Basic Rules and Strategies for Successful Trading

Why is Crypto Good For Day Trading?

Cryptocurrency has several characteristics that make it suitable for day trading.

High Volatility

Cryptocurrencies are known for their high volatility. Coins like Bitcoin can quickly jump $2000 in a day. For day traders, this means there are several opportunities for profit. Of course, the volatility of the market means day trading cryptocurrency does come with some risk. However, with proper risk management and a solid strategy, crypto offers potential gains and movements that can be hard to find in other markets like forex or stocks.

It's an Immature Market

Unlike forex or stocks, the cryptocurrency market has a lower bar on entry. Because it's easy to get into, there is a large proportion of inexperienced and newer traders. This fact means that beating the competition is a little easier than in traditional financial markets. Traders with the discipline and hunger to learn can quickly develop an edge.

24/7 365 Trading

Day trading securities and forex comes with lots of restrictions and regulations. Chief amongst these is that trading is limited to daytime hours and weekdays. However, crypto markets are open all hours, allowing traders to take advantage of situations or opportunities anytime, on any day.

Fewer Regulations

Since the financial crisis of 2008, the U.S. stock market has become tightly regulated. While most of these laws serve to protect traders, they can be a little restrictive. For example, some regulations limit how often users are even allowed to make a trade.

On the other hand, cryptocurrency is more loosely regulated. This allows day traders a little more freedom to operate in a way that is profitable to them. There are no limits on your account size or experience. In short, crypto has fewer barriers to entry than the other asset classes.

Main Cryptocurrencies Risks

High Volatility

One of crypto day trading's biggest strengths is also one of its most significant risks. Highly volatile markets offer day traders some fantastic opportunities that don't exist in many other markets. Unfortunately, this volatility can also go against you.

Crypto markets are subject to unexpected changes in market sentiment. These events can occur very suddenly and lead to steep drops in price. It's relatively common for the value of certain coins to drop by 5-10%. These dips could mean a loss of hundreds or thousands of dollars.

Excessive Leverage

Many cryptocurrency exchanges allow X100 leverage. To understand leverage, we'll use a simple example.

Let's say the price of one Bitcoin is $40,000. You take a position with $1000. The price goes up by 1% to $40,400. You make a profit of 1% of your $1000, or $10. These returns should clarify why traders use margins: unless markets move a lot, you need to make a significant investment to benefit from the swings.

One solution to this is leverage. In our example above, you can use your same $1000 investment but take out X10 leverage. This is like a loan from the broker based on your account balance. With X10 leverage, if Bitcoin rises from $40,000 to $40,400, your 1% profit is $100 instead. And with X100 leverage, it is $1000.

However, the flip side of this coin is when the market goes against you. In our example above, a price decline from $40,000 to $36,000 would mean your 1% loss would wipe out your entire $1000 and result in a margin call.

Worse still, depending on market volatility, market movement can wipe out your deposit, AND you can lose more because your account falls into debit.

With a market that is this volatile, traders need to think carefully before using X100 leverage.

Crypto Exchanges Can Get Hacked

Crypto hacks and data breaches happen frequently. These hacks can happen to even the most respected exchanges, leading to millions of dollars being transferred out of the platforms. Because crypto is largely unregulated, it's unlikely you'll see your coins again.

Illiquid Exchanges

When you are day trading cryptocurrency, some positions are easy to get into but harder to exit. Certain exchanges, and certain coins, are pretty illiquid: i.e., they don't have sufficient buy orders to support selling off your position at a reasonable price at any moment. Additionally, some typically liquid exchanges can have a low trading volume at certain times, like weekends or public holidays.

Getting stuck in an illiquid position could mean you miss out on a great spot for making some gains, forcing you to keep your position open for longer than you intended.

Do I Need a Lot of Money to Start a Career in Cryptocurrency Day Trading?

No. Most exchanges don't have a minimum deposit.

If you're new to trading, it's better to start out with a low amount of capital until you find your feet. Day trading cryptocurrency has a steep learning curve, so it's best to make your mistakes with a deposit you can afford to lose.

Once you are consistently making a profit, it can make sense to increase your deposit.

5 Best Day Trading Cryptocurrency Strategies

Scalping

Scalping is a day trading strategy that involves high trading volumes. There are a few different ways to employ scalping, but the most important aspect is to exit trades seconds after opening them — and way before market sentiment has time to change.

An example of scalping is:

Bitcoin is sitting at $43980.00. You take a position, the market moves to $44000.00, and you exit, taking $20 profit. Of course, unless you're entering the market with one bitcoin at a time, your profit will be some fraction of the $20 rise.

Because scalping produces small ROIs, this strategy is best for people with more significant amounts of capital. Scalping requires lots of small trades, with some scalpers making 15-20 trades a minute.

Arbitrage

Arbitrage involves exploiting different crypto prices across different exchanges. Simply, it is the process of buying crypto in one market and selling it for profit on the other.

This strategy requires you to keep a balance between multiple crypto exchanges so that you are prepared to pounce once an opportunity presents itself.

A straightforward example of this principle is:

1

You notice Binance currently sells Bitcoin for $44,200, while Coinbase is buying Bitcoin at $45,200.

2

You log in to Binance and buy one Bitcoin for $44,200.

3

Then, you log in to Coinbase and sell one Bitcoin for $45,200.

4

You realize a profit of $1,000 - minus sell fees.

Of course, opportunities as stark as this don't come up every day. But because exchanges offer different prices, you can consistently make a tidy profit if you're attentive enough.

Golden Cross/Death Cross

The Golden Cross and Death Cross methods focus on two moving averages: the 50-day moving average (50 MA) and the 200-day moving average (200 MA).

If the 50 MA goes above the 200 MA, this is a signal to buy.

However, if the 50 MA goes below the 200 MA, this is a signal to sell.

While this strategy probably works best for long-term trading, it produces results for day trading too.

Range Trading

Quite often, crypto trades for an extended period inside a specific range. For example, Bitcoin might trade between $40,000 and $43,000 for a month. This range is around ±6.9%.

Because many cryptocurrency markets are relatively small, big movers (or whales) can manipulate the market up and down to profit from the range. If you see a pattern like this, you can get involved too.

To profit from range trading, you need to know the oversold and overbought zones (see chart above).

Overbought means that interest buyers have enough crypto, and they're looking to sell. Oversold means that traders want to buy crypto. Range trading works by fixing a range between the support and resistance levels.

There are several ways to find these zones, including chart indicators, relative strength index (RSI), or a Stochastic Oscillator.

Sentiment-Based Trading

Sentiment-based trading is a day trading strategy that seeks to use the news to predict the market's price. To make this strategy work, you'll need to be up-to-date on any news and information, crypto regulation reports, and even Google trends.

An example of sentiment-based trading is as follows.

Sentiment-Based Trading Example

1

You have Twitter alerts for Elon Musk and crypto news.

2

Per the chart above, Musk says Tesla is likely to accept Bitcoin again.

3

You move in and buy, also carefully defining an exit point.

4

As news filters through about Musk's statement, the price goes up, and you exit at your defined point with a profit.

5 Tips for Crypto Successful Day Trading

1 - Risk Management:

Cryptocurrencies are incredibly volatile, so day traders need to implement sound risk management to protect their balance. This involves never investing more than you are comfortable with losing.

2 - Position Sizing:

Position sizing is another aspect of risk management. Put simply, you should never invest more than a few percent of your account balance in one trade. While often the temptation to invest more is strong, the best traders are disciplined and don't let emotion rule them.

A good rule of thumb is never to invest more than 2% of your balance in one trade. Additionally, never invest more than 6% of your balance in one session. Losing runs will happen, but don't try and chase them — it can lead to serious damage to your account.

3 - Stop Loss + Take Profit

This is another crucial risk management concept. A stop loss is an executable order that closes a position if the price drops to a certain level. In comparison, take profit is a different executable order that liquids a position when prices rise to a particular level. Disciplined use of these orders will stop you from losing too much on any trade.

For example, I buy Bitcoin at $45,000. I set my stop loss at $44,000 and my take profit at $46,000. If the market lurches violently against me, I only lose a few percent of my investment.

4 - Look for Coins With High Liquidity and High Volatility

There are thousands of different cryptocurrencies. While most of them are volatile, not all of them are highly liquid. There is money to be made by trading smaller altcoins; however, the risk is increased. If you enter a day trade, the coin must have liquidity so that you can exit the position. Failure to exit at the right point will hurt your profits.

5 - Place Your Stop Loss Just Below the Low of the Day

Place your stop loss below the low of the day. If the market drops past this low, it's suggestive of a change in market sentiment. In that case, it's best to get out of the trade and look for other opportunities.

Why Binance is the Best for Crypto Day Trading

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Your capital is at risk.

Binance is one of the worlds leading cryptocurrency exchanges. They offer a secure online platform with a good range of crypto trading products. Additionally, the platform is licensed by several regulatory agencies.

All the above is reassuring from a security level, but what sets Binance apart is its vast daily trading volumes that can go as high as $80bn. Finally, Binance offers over 500 different cryptocurrencies. Read also how to choose a crypto exchange for day trading.