Day trading is the practice of frequently buying and selling assets in order to make a profit on intraday changes in their price.
What Is Day Trading?
In stock, cryptocurrency
and other markets, the prices of assets tend to change continuously during the day under the effects of supply and demand. Most of the time, especially in less volatile environments, these fluctuations are too small to be a concern to long-term investors. However, there is a category of market participants called day traders, who actively try to extract a profit from these movements.
The activities of a day trader involve trying to predict the short-term price actions of the assets they are trading in order to make favorable buy or sell deals. This is a high-risk, high-reward activity due to an immense number of factors affecting intraday price fluctuations, some of which are hard or impossible to evaluate.
Day traders employ different tools and techniques to conduct the best trades they can. Some try to analyze the price history of an asset in order to find price chart patterns that might repeat themselves in the future — a practice known as technical analysis
. Others develop or purchase trading software that uses computing power to analyze current market data and conduct trades automatically. The rest still trade based purely on instinct.
The cryptocurrency market, with its infamously high volatility
, provides an exceptionally risky but potentially lucrative ground for day traders. When assets’ prices quite often change by 10% or more within a single day, both the profits and the losses can be significant.
What Are Day Trading Crypto Strategies?
The high volatility of cryptocurrencies results in several day trading crypto strategies being potentially profitable.
is one of the simplest day trading crypto strategies. Arbitrageurs
buy cryptocurrency from one source, such as a decentralized exchange
, and sell it at a higher price elsewhere. The spread between the two prices is the profit margin. Since cryptocurrencies are, to a large degree, unregulated, and liquidity
in the markets varies, spreads between different exchanges and protocols can be significant.
Arbitrageurs have accounts on different centralized exchanges
and DeFi protocols to capitalize on arbitrage opportunities. One popular trade used to be selling Bitcoin
in Korea, where it traded at a significant premium due to regulation (the Kimchi premium
uses different points in the market, where a significant amount of liquidity is provided. These are called support and resistance, and swing traders are experts at identifying points of support and resistance
in the markets through candlestick
chart analysis. Their trading plan is based on successfully investing at certain points of support and resistance and pocketing the difference in the price as profit. Swing traders can bet both on price action breaking through these levels or trading between them. A successful swing trading crypto strategy relies on excellent knowledge of the markets and technical analysis.
is another popular crypto day trading strategy. Scalpers aim to benefit from an existing impulse move in the markets to generate a profit in a short amount of time. These slight price fluctuations can be traded on very low time frames, such as seconds, or higher timeframes, such as hours or sometimes days. Scalpers use margin trading
to multiply their exposure since the price ranges they target are relatively small. They also often use trading bots to gain an edge. Like for any crypto trading strategy, sound bankroll management is key.
Mistakes to Avoid While Day Trading Crypto
Crypto day trading is extremely challenging and many beginners or even veteran day traders do not know the mistakes to avoid while day trading crypto.
is a classic beginner’s mistake when a trader lets emotions take control of their actions. Instead of following a trading plan, FOMO leads traders to make impulse decisions, often leading to losing trades and causing overtrading
Overtrading happens when a trader enters a position that has no positive expected value. Traders that overtrade try to “force” profits and do not follow a predetermined plan according to a strategy. Overtrading can also lead traders to chase losses and try to win it all back in one trade.
Lack of Bankroll Management
Many beginner traders are overconfident in their abilities and take excessive risks with their trades. This lack of financial discipline can often cause other mistakes when a trade goes wrong and lead them to overtrade or chase losses.
Lack of a Trading Strategy
Beginner traders also tend to start trading “on a whim” without a properly designed and tested trading strategy. Even though crypto markets are less mature than other financial markets, trading profitably without a designated strategy is very hard to pull off.
Advantages and Disadvantages of Day Trading Crypto
Day trading crypto has several advantages and disadvantages.
Advantages of Day Trading
Day trading allows for a flexible work schedule since cryptocurrency markets operate 24/7.
The volatility and relative novelty of crypto markets mean they are not mature and offer even unsophisticated traders plenty of opportunities.
Thanks to a plethora of DeFi protocols, traders can build different profitable strategies.
The learning curve can be made as simple or steep as the trader wishes.
Trading skills are transferable to other markets.
Disadvantages of Day Trading
The risk of ruin is significant since beginner traders tend to overestimate their capabilities.
Discipline and managing emotions are difficult skills to master and require a lot of time.
The round-the-clock nature of crypto markets can be emotionally and mentally taxing and lead to high levels of stress and even burnout.
Tax compliance is difficult since each trade needs to be accounted for.
With the influx of institutional investors
, a much higher level of skill is needed to trade profitably.