Crypto Day Trading: 2 Common Strategies (And 4 Rookie Mistakes)
Day trading crypto has gained immense popularity in recent years as more and more individuals seek to profit from the volatility of digital assets like Bitcoin, Ethereum, and others.
And in case you’re wondering, yes, day traders are the ones who are typically glued to their computer screen (and there are usually more than one on his desk.)
This is because day trading is extremely fast-paced, and can be both lucrative and risky. In this article, we’ll explore the basics of day trading crypto, two main day trading strategies as well as common mistakes beginners make when they start their day trading journey.
What is Day Trading in Crypto?
Day trading crypto involves buying and selling digital currencies within the same trading day, attempting to capitalize on price fluctuations that occur during that time frame. Unlike long-term investors, day traders do not hold their positions overnight. Instead, they aim to profit from short-term price movements, often executing multiple trades throughout the day.
This is why day traders need to have good technical analysis skills i.e. the ability to scrutinize and understand price charts, coz when you’re making such short-term trades, factors like macroeconomic trends matter much less.
Beginner traders interested in day trading can start by identifying candlestick patterns like doji, hammer, shooting star, engulfing patterns, and more. These patterns can indicate potential reversals or continuation of trends.
So how does one actually go about day trading? Here are two of the more common strategies.
Crypto Day Trading Strategy #1: Breakout Trading
One lesser known day trading strategy that has been proven to be effective is the Breakout Trading Strategy. This strategy involves identifying stocks or cryptocurrencies that are breaking out of consolidation patterns or trading ranges, rising above the previous resistance level.
To use the Breakout Trading Strategy, traders will need to identify a stock or cryptocurrency that is trading in a consolidation pattern or trading range. A consolidation pattern is a period of time where the price of the asset is relatively flat and moves within a narrow range. A trading range is a period of time where the price of the asset moves between two relatively consistent levels.
Once a trader has identified a stock or cryptocurrency that is trading in a consolidation pattern or trading range, they will wait for the price to break out. A breakout occurs when the price of the asset moves above or below the consolidation pattern or trading range.
Once the price has broken out, the trader can enter a long trade (if the price has broken out to the upside) or a short trade (if the price has broken out to the downside). Smart traders will also place a stop-loss order below the consolidation pattern or trading range to limit their losses.
Important reminders:
- Only trade stocks or cryptocurrencies that are trading in a clear consolidation pattern or trading range i.e wait for the price to break out above or below the consolidation pattern or trading range before entering a trade.
- Be wary of false breakouts, which are more common than you might think.
Crypto Day Trading Strategy #2: Scalping
Scalping is a popular day trading strategy that involves making a large number of small trades to profit from minor price fluctuations within a short time frame. The goal of scalping is to accumulate small gains rapidly, taking advantage of even the smallest price movements.
As such, scalpers enter and exit trades swiftly, often within seconds or minutes. In fact, scalpers typically use the 1-minute, 3-minute, or 5-minute charts. These short intervals allow them to spot and act on rapid price movements.
Scalping works best in highly liquid markets where there are many buyers and sellers, resulting in tight bid-ask spreads. Cryptocurrency pairs, forex, and heavily traded stocks are often preferred choices for scalping.
It has to be mentioned that successful scalpers are among the best at technical analysis, since they need to correctly identify entry and exit points. Common technical indicators used by scalpers include moving averages, Relative Strength Index (RSI), and stochastic oscillators.
One final point: Scalpers rely on tight stop-loss orders to limit potential losses. Since they aim to capture small profits, they are also quick to take profits, often setting take-profit orders just a few pips or cents away from their entry point. The risk-reward ratio in scalping is typically skewed towards smaller gains and smaller losses.
Is Day Trading Crypto Worth It? Yes, If You Are This Kind of Trader
While day trading can be potentially profitable, it’s not suitable for everyone. Here are the kinds of traders for whom day trading may be most suitable:
- Those who do not have full-time jobs: Day trading requires intense focus, discipline, and active involvement throughout the trading session. It’s best suited for traders who can commit a significant portion of their day to monitoring the markets and executing trades.
- Those who eat risk for breakfast: Day trading involves a high level of risk due to frequent trading and the potential for rapid price fluctuations. Traders should be comfortable with the possibility of both gains and losses within a short time frame.
- Those who can make decisions on the fly: Day traders need to make quick and decisive decisions. They must be able to analyze market data, identify opportunities, and execute trades rapidly, often within seconds or minutes.
- Those who are not led by their emotions: Emotions can be a significant challenge in day trading. Traders must remain disciplined and avoid impulsive decisions driven by fear or greed. Emotional stability and mental resilience are crucial.
- Those who love geeking out on charts: Day traders rely heavily on technical analysis, such as chart patterns, indicators, and trend analysis. Those with a strong interest in and understanding of technical analysis may find day trading appealing.
- Those who can afford to splurge on real-time data and technology: Day traders need access to real-time market data and advanced trading platforms with fast execution. High-speed internet connectivity and reliable hardware are essential tools.
- Those who have some excess money to spare: This is perhaps one of the most important points. Day trading requires sufficient trading capital, which varies depending on the asset being traded and the trader’s risk tolerance. Traders should be financially prepared to withstand potential losses and maintain a cushion of capital.
Four Common Beginner Mistakes in Day Trading Crypto
Mistake #1: Lack of discipline. Failing to adhere to a trading plan, letting emotions drive decisions, and deviating from established strategies are signs of undisciplined trading.
Solution: Develop a clear trading plan that includes entry and exit criteria. Stick to your plan, avoid impulsive actions, and maintain emotional control.
Mistake #2: Overleveraging. Beginners may use excessive leverage, borrowing more money than they can afford to trade larger positions.
Solution: Use leverage cautiously, if at all. Understand the risks associated with leveraged trading products and consider trading without leverage when you’re starting out.
Mistake #3: Chasing losses. What this means is that when beginners experience losses, they may chase after these losses by making bigger and riskier trades to recoup their money.
Solution: Accept that losses are a part of trading. Don’t chase after losses; instead, stick to your trading plan and avoid revenge trading.
Mistake #4: Impatience and unrealistic expectations. Beginners may expect quick and consistent profits, leading to impatience and frustration.
Solution: Recognize that day trading requires time and practice. Set realistic expectations and focus on continuous improvement rather than instant riches.
Conclusion
Day trading cryptocurrency can be a rewarding endeavor for those willing to put in the time and effort to learn, develop a solid strategy, and manage risk effectively. As we have seen, it’s also perfect for those who do not want to lose sleep over their trades–it’s like not bringing any work home with you.
However, it’s important to approach day trading with caution and to be prepared for both wins and losses. Remember that success in day trading requires continuous education, practice, and discipline.
