Day trading is one of the most commonly used trading strategies. Day traders are active in most financial markets, such as stocks, forex, commodities, and of course, the cryptocurrency market. But is trading crypto on a daily basis a good idea for you? How do day traders make money? Should you start this type of trading?
Unfortunately, we don’t have a single answer to these questions, but this article will explain what you need to know before you start day trading crypto.
What is day trading?
Day trading is a trading strategy by entering and exiting trading positions on the same day. Since day trading is carried out on the same day, this strategy can also be referred to as intraday trading. The aim of day trading is to use an intraday trading strategy to take advantage of changes in the price of a financial instrument.
The term day trader comes from the stock market, where trading is only open during the weekdays of the week. In this context, day traders never leave positions open more than overnight, as they aim to take advantage of intraday price movements.
How do day traders make money?
Successful day traders are sure to have a deep understanding of the market and a wealth of experience. Day traders usually use technical analysis (TA) to create trading ideas. Generally use volume, price movements, chart patterns and technical indicators to identify trade entry and exit points. As with any trading strategy, risk management is essential for success in day trading.
As fundamental events may take a long time to play out, day traders don’t really care much about fundamental analysis (FA). Even so, there are some traders who base their strategy on “trading the news.” Find assets with high volume thanks to the latest announcements or news and take advantage of temporary price spikes in trading activity.
Day traders aim to take advantage of market volatility. Thus, volume and liquidity are very important. After all, good liquidity is required to make fast trades. You’ll see why when you have to get out of position. A large slippage on just one trade can adversely affect a day trading account. This is why day traders will usually trade on highly liquid market pairs.
Some people will even trade only one market pair, such as BTC / USDT. Others may create a watchlist based on technical or fundamental tools (or both) and choose which instruments to trade.
Daily trading strategy
Scalping is a very common trading strategy among day traders. It is done by taking advantage of small price movements that occur on a short time frame. It could be from liquidity gaps, bid-ask spreads, and other market inefficiencies.
Scalpers often trade on margin or trade futures contracts to increase the yield obtained with leverage. Since the target price percentage tends to be smaller, a larger position size makes more sense. In fact, this applies to most day-to-day trading strategies.
However, trading on leverage does not mean that risk management principles should be neglected. A successful scalper will know the margin requirements and apply the proper position size rules. If you want to read about a simple formula for determining position size, see How to Calculate Position Size in Trades.
Scalpers can use strategies such as order book analysis, volume heatmaps and multiple technical indicators to determine entry and exit points for individual trades. However, due to fast trade execution with high risk, scalping is generally more suitable for skilled and experienced traders. Also, due to the use of leverage, some unskilled traders can quickly wipe out their trading accounts.
2. Range of trading
Range trading is a simple strategy that involves analyzing candlestick charts and observing support and resistance levels. As the name suggests, range traders look for price ranges within the market structure and create trading ideas based on those ranges. For example, if the price ranges between support and resistance levels, traders can buy support levels and sell resistance levels. Conversely, one can open a short position at the resistance level and exit at the support level.
The idea of range trading is based on the assumption that the edges of the range will remain as support and resistance until the ranges are broken. Meaning that the lower edge of the range is likely to push the price up, while the upper edge of the range is likely to push the price down.
However, the longer the price touches a support or resistance level, the more likely it is that it will be broken. This is why range traders will always be prepared for opportunities if at any time the market gets out of this range. Usually, by setting a stop-loss at the level where the breakout of the range is confirmed.
Range trading is a relatively straightforward strategy suitable for beginners. This requires a good understanding of the candlestick chart, support and resistance levels, and may involve a momentum indicator such as RSI or MACD.
3. High-frequency trading (HFT)
High-frequency trading is a type of algorithmic trading strategy usually used by quantitative traders (“quant” traders). This strategy involves developing algorithms and trading bots that can quickly enter and exit multiple positions in a short amount of time. How short is the time frame? Imagine milliseconds. A few milliseconds of profit from a high frequency trading company can give you a significant advantage over other companies.
HFT algorithms can be made to implement very complex strategies. While high frequency trading may seem tempting, it is, in fact, much more complicated than it seems. High-frequency trading includes many backtesting, monitoring and tweaking algorithms to adapt to ever-changing market conditions. So, if you think you can sit back while a trading bot does all the work until it clears up for you, that’s very far from the truth.
One thing to consider: high frequency trading is a very exclusive industry. Because of this, high-quality information is difficult for the general public to find. Why is that? The answer is quite simple. If successful trading firms and hedge funds share their high-frequency trading strategies with individual investors, those strategies will no longer work.
Also, there are additional points you should consider when it comes to trading bots. If someone has built a profitable trading bot, why don’t they use it themselves, why are they selling it instead? This is why you should be extremely careful when considering buying high frequency trading bots.
Developing an HFT bot requires an understanding of market concepts as well as in-depth knowledge of math and computer science. Because of this, it is more suitable for advanced traders.
How to start day trading
You can read the Complete Guide for Beginners to Trading Crypto, which explains everything you need to know about trading, along with some tips for retail investors. If you still need basic concepts, you can then do paper trading on the Binance Futures testnet. This way, you can test the trading system first without risking real money.
The question is, what is the best online trading platform for day trading cryptocurrencies? Well, we can’t decide for you, but you can try with Binance and Indodax which have an ecosystem offering hundreds of market pairs, margin trading, quarterly and perpetual futures, leveraged tokens, real-time market data, and much more. Head over to Binance, convert your fiat currency to crypto asset, and start trading right away.
Is day trading suitable for a living?
Day trading can be a very profitable strategy, but there are a few things to consider before getting started. Since day trading requires fast decision making and execution, this activity can be very stressful and very demanding. Day trading can also be very risky and requires a deep understanding of the market. Naturally, this type of trading also requires you to stare at the screen for long periods of time.
Are you able to handle all of these burdens, while also potentially losing money? You should carefully consider whether day trading fits your personal investment goals and trading style.
If you are unsure whether day trading is the right strategy for you, check out the Crypto Trading Strategy Guide for Beginners. In this article, various strategies are suitable for active traders, for example, swing trading. Getting to know these strategies can help you make better choices for discovering your trading style.
Day trading is a trading strategy commonly used in trading stocks and cryptocurrencies. Day traders use intraday trading strategies to try to take advantage of market volatility, and usually won’t stay in the same position for more than a day.
Day traders use technical analysis, chart patterns and technical indicators to identify trades. Some of the most common day trading strategies include scalping, range trading, and high-frequency trading.