If you want to become a trader in financial markets including cryptocurrencies, the first thing you need to decide is what type of trading suits you the best. There are a number of widely adopted trading strategies in capital markets, which differentiate from each other by the average time period that you need to hold on to your trade positions.
What is Day Trading?
Day trading is one of the most popular trading strategies due to its nature of cashing profits every day. In that sense, day trading is the practice of buying and selling a financial asset within a single trading day. It is also called “intraday trading”.
The practice of day trading originated in traditional markets such as stocks and commodities because you are able to trade during the business hours only in these markets. Trade positions are closed at the end of every business day to avoid any negative price gaps when the market opens the next day.
Unlike traditional money markets, cryptocurrency markets never close. Instead, they are active 24/7, so day trading is practiced in cryptocurrencies in order to avoid exposure to overnight price movements, which could be huge in this highly speculative asset class.
How Do Day Traders Make Money?
A day trader relies heavily on daily price volatility in the market to make a profit. In that regard, day traders seek to locate a low price during the day and try to sell it higher for a profit before the end of the day (or the exact opposite if they short-sell). To make any meaningful profit, day traders may need to open and close multiple positions on a day depending on market conditions.
The rule to follow strictly in this trading strategy is to close all positions by the end of the day to realize daily profits, which can act as incremental capital to potentially open larger trade positions on the next day.
Day traders generally use chart patterns, momentum indicators, and trade volume to identify entry and exit points for their daily trades.
Since important events and developments most likely take longer than a single day to play out, day traders usually do not benefit from fundamental analysis while developing their strategies. Still, it is common to make trades based on regular and scheduled announcements, news, and developments. This involves trading assets that spike in volume due to a recent announcement or piece of news in order to make a quick profit.
Time Zones in Crypto Day Trading
In cryptocurrencies, your time zone heavily affects your day trading as trading is round the clock. Most cryptocurrency markets are timed according to the Greenwich Mean Time (GMT), so the daily closing and opening price of a cryptocurrency is set at GMT 00:00.
In the crypto market, sharp price movements are generally known to occur when there is either a low liquidity or a sudden drop in liquidity. And daily closings (GMT 00:00) may be followed with such liquidity swings in the first few hours of the next day, which would be the late night hours for Europe and the Middle East. In that situation, a trader located in these regions may choose to close their positions if they go to sleep before or around GMT 00:00.
East Asia and North America together constitute the largest liquidity and trading volume in crypto markets, so there is also a significant drop in market liquidity when one or both of these markets turn inactive during the day. Such factors should be considered as you build a schedule for your day trading activities.
Severe price oscillations may not happen frequently throughout a given day despite the changing liquidity conditions, because larger price actions require a larger imbalance of buy and sell orders (and thus supply and demand), which does not happen that often. Due to that, cryptocurrency day traders often use leverage such as margin loans in order to increase their profit levels. However, margin trading comes with significant risks especially for beginners. You may lose your entire capital during times of extreme price volatility.
Risk management is always essential in day trading and the very first rule of risk management mandates that you should never trade positions that are larger than what you can afford to lose.
Day Trading Strategies
Range Trading
A day trading strategy that involves buying a cryptocurrency at short-term support levels and selling at short-term resistance levels. To do that, day traders need to identify a short-term price range within the market structure on a price chart. Identifying price ranges and accompanying support and resistance levels requires significant candlestick analysis.
For example, you can place a buy order when the market price hits the short-term support level in the price range and then place a sell order at the resistance. Alternatively, you could short-sell at the resistance and exit your position down at the support level.
Range trading could be the most straightforward and easy-to-execute strategy for beginner traders because it assumes that the support and resistance levels of a price range will hold for the foreseeable future, which makes identifying support and resistance levels on a price chart quite easy.
However, you should carefully note that testing the same support level over and over again is not safe for the price range to hold. Testing a support line twice could act as a short-term double bottom, which is a trend reversal pattern (so, it is bullish) and testing it three times can act as a triple bottom, which is also bullish. Yet, the more times the price touches down a support level, the more likely it is to break that support to the downside. Traders should always use a stop-loss at prices near the support when practicing range trading.
Finally, range trading does not require you to keep positions all day long; you can take your profits and close positions as soon as your target prices are reached.
Trading Intraday Price Crashes or Spikes:
A day trader can look and wait for possible intraday price crashes or spikes to enter into a cryptocurrency trade. Such unexpected short-term price moves are most likely followed with a bounce or a drop depending on the direction.
For example, a day trader can open a long position immediately after a sudden price crash in a cryptocurrency and sell it at the very next resistance level, or sell when the currency’s short-term momentum indicators become overbought. You can alternatively short-sell an intraday price spike and close the position with a profit as the price falls back.
In that light, making use of short-term momentum indicators such as relative strength index (RSI), stochastic RSI, and MACD is quite critical to be able to profitably trade intraday price movements. Other than momentum indicators, Bollinger bands, the Volume-Weighted Average Price (VWAP), and Fibonacci retracements are among the prominent technical analysis tools that day traders use to develop strategies.
Scalping
Scalping is the practice of trading very tiny price moves that repeatedly happen on short time frames throughout the day. These tiny price moves often happen due to bid-ask spreads or liquidity gaps in order books.
The level of profits are generally very small in scalping, so scalp traders often use leverage to amplify their profits. However, it is very critical to follow risk management practices when trading with leverage, such as keeping order sizes at appropriate levels and complying with margin requirements.
To be able to scalp trade successfully, you need to continuously analyze order books of cryptocurrency pairs to identify bid-ask spreads and supply and demand imbalances. This has to be complemented with momentum indicator analysis (RSI, stochastic RSI, MACD etc.), where you need to identify the overbought and oversold areas in short time frames. The purpose of all these activities is to define ideal entry and exit points for individual trades.
Due to very fast execution times in scalping, this type of day trading is considered more suitable for experienced traders. The need for using leverage to make meaningful profits can ruin your trading account with only a few successful trades.
Trading on News
Day trading based on news seeks to profit from surging price volatility around the scheduled announcements of news and developments. As a typical news trading strategy, you may choose to trade counter to the market during such events (buying the lows upon announcement if price dumps right before the scheduled announcement, or selling the highs upon announcement if price hikes before the announcement etc).
This is also a pretty tense and risky day trading strategy that could be more suitable for experienced traders because markets can be very chaotic upon announcement of news or other developments. If you end up on the wrong side of the trade, you can lose a lot of money in even less than a minute.
Arbitrage Trading:
Arbitrage means the same financial asset is traded for a different price at two or more different exchanges. So to do arbitrage trading, you need to buy the cryptocurrency at the cheaper exchange and then sell the asset for a profit at the more expensive exchange.
You should note that all of the above methods are way easier said than done. It takes significant time, patience, and discipline to achieve consistency in the profitability of your strategies and your trades. In addition, successful day trading requires extensive market knowledge and experience about the assets you trade.
Pros and Cons of Day Trading
Pros
- Positions are closed by the end of each day, so you are unaffected by developments during off-trading hours or when you sleep at night.
- High frequency day traders have access to much lower trading fees compared to average traders.
- If you are able to become profitable in your day trading, returns on your trades compound much faster than holding onto positions. The profits you cash every day can be used as additional capital to open larger positions the next day and generate even larger profits.
- Making a huge number of trades compared to long-term traders or investors significantly increases your learning curve.
Cons
- You may end up paying too much trading fees and commissions, since you need to open and close a multitude of positions every day, which could eliminate a large portion of your daily profits.
- If you cannot develop a consistently profitable methodology, losses in day trading amount very quickly since you trade very often. This holds especially true if margin is used to leverage your trades.
- In financial markets, the majority of trades would usually require more than a single day to make meaningful profit, so there may not be sufficient time for your trade position to realize a profit before you close it by the end of the day.
- Although trade positions are closed at the end of a day to eliminate overnight losses, things may also go the opposite way with cryptocurrencies. It is very common for a cryptocurrency to get a price hike when you sleep at night. In that sense, day traders are unable to reap the benefits of low liquidity hours.
Useful Tips
Useful tips to keep in mind while you day trade:
- Risk a very small portion of your account per trade (1% to 2%),
- Always use stop-losses at prices close to support levels,
- Stay away from illiquid tokens since these can incur large bid-ask spreads and price slippages when you execute your trades.
Some Additional Thoughts
You should also be realistic about your profitability rate and note that the majority of successful traders win only 50 to 60% of their trades. However, successful traders profit more in their winning trades than they lose in losing trades, so that is how they keep accumulating more capital as time passes.
Due to that, day trading is all about consistency and you should always refrain from opening and closing positions based on your emotions and impulses. And to do that, you need to limit your position sizes to a small percentage of your account so that it does not take a toll on your emotions.
Regardless of which trading strategy you adopt, you should always stick to the principles of that strategy. You may start trading by practicing a number of different strategies to see which one matches your individual personality, but once you make your decision, you need to adhere to its principles patiently and diligently.
In trading, the worst losses are known to be made by a lack of patience and self-discipline, and by consequently trying out different alternatives that derail you from your original trading strategy.
For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.
