A Guide to Day Trading Cryptocurrencies – Analytics Insight

by November 21, 2022



Cryptocurrency trading has become more liquid over time, and the asset is considered a candidate for lucrative day trading provides a day trading opportunity for many people around the world. Day traders buy and sell cryptocurrencies during the day, attempting to profit from sharp price fluctuations. The term “day trading” refers to the idea that a trader will open and close their position during the day and not hold the risk overnight. Day trading strategies are usually driven by technical analysis and require strong risk management and self-discipline. Some day trading occurs around specific events, where the investor believes what is priced into the market is not reflected by the value of the cryptocurrency. Successful cryptocurrency day trading requires a sound strategy, robust risk management, and the ability to concentrate on cryptocurrency throughout the trading day.

Day Trading Basics

Day trading is when an investor purchases and sells or short-sells and then repurchases a cryptocurrency. Day trading can be performed on most assets, but you want to ensure enough liquidity before you start to day trade an asset class. Some traders think day trading works best when there is a tight bid-ask spread and you enter an exit position without extensive slippage (the market moving while you are trading). When you day trade, your strategies are focused on short-term movements. You are much less concerned about the general direction of the cryptocurrency you are trading and instead want to predict the action over the next few minutes or hours. If you day trade cryptocurrencies, you need to be tuned into any economic releases, monetary policy releases, political changes, and other significant events that might alter the landscape for cryptocurrencies.

Day Trading Strategies

Day trading requires activity throughout the trading day. Some traders approach day trading using an automated system that systematically transacts when you reach specific price levels. If you plan to day trade where you are transacting yourself without the help of automation, you need to be around to make trades when you enter and exit a position. It would help if you also were around most of the day to ensure you do not miss an opportunity.

Some of the most popular day trading strategies involve the use of technical analysis to make trading decisions including quick-profit systems, range trading strategies, or high-frequency trading, which uses statistical information to make a trading decision.

What is Quick-profit?

Quick-profit is a crypto trading strategy focusing on generating small profits and losses from sharp exchange rate movements. To drive potential profits, you can use trend-following cryptocurrency quick-profit or momentum cryptocurrency trading strategies. When you engage in quick-profit, your goal is to generate small profits and losses and more wins than losers. Significant gains are not the goal. Quick-profit requires several trades throughout the day. The positions you take can be open for seconds, minutes, or even hours, but you want to take profits quickly. Remember, however, that no strategy is perfect and profits are never guaranteed.

One strategy involves looking for a short-term trend that is about to occur. For example, when the 5-minute moving average of Bitcoin crosses above or below the 20-minute moving average of Bitcoin. A buy signal is generated when the shorter-term moving average crosses over the longer-term moving average. When the shorter-term moving crosses below the longer-term moving average, a sell signal or reversal is created. Some quick-profit trading strategies have a risk management component that is a stop and reverse, while others might have you exit your position.

The risk management used in a quick-profit trading strategy involves winning more than you lose, and the amounts you win and lose are about the same. For example, if you trade ten times, you want to ensure you win at least six times, and the amount you win equals the amount you lose.

What is Range Trading?

Another day trading strategy is range trading. Range trading involves buying and selling cryptocurrencies when they reach the end of a pre-defined range. Before you enter the trade, your objective is to define your profits and losses and how each transaction will impact your portfolio. Like quick-profit, range trading is for active investors who plan to trade the cryptocurrency markets throughout the day. You can automate the process, but if you plan to place trades yourself, you must be tuned in to what is happening intra-day.

An example of a range trading technical analysis tool is Bollinger Bands. Bollinger bands, created by John Bollinger, are a technical analysis tool that uses volatility to create a trading range. Bollinger bands create a mean using a specific moving average. The standard is usually a 20-period moving average, but any period can be used. The concept is that the cryptocurrency you are trading will eventually return to the mean, however this is not guaranteed to happen.

The Bollinger bands are made up of a moving average, a Bollinger band high, which is two standard deviations above the moving average, and a Bollinger band low, which is two standard deviations below the moving average. The standard deviation range can be any level. Two standard deviations capture 95% of the returns that are created. One standard deviation captures about 68% of the returns, while three would capture 98% over the period you are evaluating.

A typical Bollinger band strategy has an investor selling a cryptocurrency when the exchange rate reaches the upper Bollinger band. The take-profit level could be the moving average used to create the Bollinger band. An investor might buy a cryptocurrency when the exchange rate reaches the bottom Bollinger band. The risk management could be to sell your cryptocurrency when the exchange reverts to the mean.

Another subjective range trading could be accomplished using trend lines as support and resistance. Support is a price level where demand is strong and helps prevent a cryptocurrency from moving lower. Resistance is a point where supply is robust and generally contains a cryptocurrency from moving higher. If you set up support and resistance levels, you can buy at support and sell at resistance to generate short-term day trades using a mean reverting process.

Remember, however, that these strategies are just explanatory and not intended in any way as trading advice.

Trading Around News

Some day traders trade around the news. When new information becomes available, a cryptocurrency’s exchange rate might surge or drop. In those instances, a day trader could take a position before the news is released right after speculating that the exchange rate will not continue its surge or drop off. Trading the news can be difficult, as it is tough to know if the new information will continue to drive a cryptocurrency’s future movements. You might consider day trading news in conjunction with other technical analysis tools.

Risk Management

Day trading risk management is less focused on generating many small profitable trades. The math behind day trading requires that you win more than you lose and that the losses and gains are about the same size. This scenario differs from other types of investing strategies in which the size of the winners dwarfs the size of the losing trades.

For example, if you are trading using a strategy that holds positions for months at a time, you might be able to lose more times than you win if the profits on winning trades are more than the losses on unsuccessful trades. If you have nine trades and you win three times $100 on each trade (+$300), then you can lose six times where you have a loss of $50 on each trade ($300) and still break even.

The Bottom Line

The upshot is that day trading cryptocurrency can be optimized if you use specific tools to help you generate trades. One of the benefits of day trading cryptocurrency is that you are not taking risks that occur when you are not actively trading. Day trading means that you plan to exit your position by the end of the day.

Day trading strategies include quick-profit and mean reversion trades, where you attempt to capture sharp movements by a cryptocurrency. The term quick-profit refers to sharp moves in the exchange rate of a captured cryptocurrency. The goal is to win more than you lose. Risk management is focused on winning and losing the same amount of money.

While it is possible to day trade if you have the processing automated, you should avoid day trading if you cannot watch the markets regularly and plan to trade manually. If news or events occur, you might not be in a position to react.

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