A Beginner’s Guide to Day Trading Cryptocurrency
Introduction
One of the most common trading strategies is day trading, which is also known as short-term trading. Day traders are generally active in a wide range of financial markets, including shares, forex, commodities, and of course, cryptocurrencies. But how do you decide whether day trading cryptocurrency is the right strategy for you? In what way do day traders make money? Should you become a day trader? There is no single answer that we have to those questions, but this article will explain some of the things you need to know before you delve into day trading cryptocurrency.
What is day trading?
In day trading, positions are entered and exited on the same day of trading; it is an intraday trading strategy. In this strategy, the trades are executed during the same day, and therefore, it can also be called intraday trading. There is no doubt that the purpose of day traders is to try and take advantage of price changes in financial instruments in an intraday basis so that they can make a profit.
There are several definitions of the term "day trader," which are based on the stock market. Trading on the stock market is only available during business hours. The purpose of day traders is to capitalize on intraday price movements. As such, day traders never leave open positions overnight.
How do day traders make money?
It is essential for successful day traders to have a deep understanding of the market as well as a lot of experience. Technical analysis (TA) tends to be a tool that most day traders use to create trading ideas. In order to identify entry and exit points for trades, traders usually rely on volume, price action, chart patterns, and technical indicators. Day trading relies on risk management, just as with any trading strategy.
It is likely that day traders do not pay much attention to fundamental analysis (FA), as major fundamental events may take a long time to work out. Yet, there are still some traders who focus on trading the news as their primary strategy. That involves finding assets that have high volume due to a recent announcement or piece of news and taking advantage of the temporary spike in trading activity that comes along with it.
The aim of day traders is to take advantage of market volatility in order to profit from it. The volume and liquidity of the market are therefore crucial to day trading. Day traders are dependent on good liquidity for quick transactions. This is true especially when it comes to exiting positions. A large slippage on a single trade can have a detrimental effect on the trading account of a day trader. This is one of the reasons why day traders will typically trade highly liquid market pairs.
Day traders will often only choose a single trading pair to trade, such as BTC/USDT for example. Alternatively, you might create a watch list based on fundamental or technical attributes (or both) and decide what instrument to trade out of that list.
Day trading strategies
Scalping
Day traders typically use the strategy of scalping as part of their trading strategy. it involves taking advantage of small price movements that occur on a short timeframe in order to make profit. It can include inefficiencies in the market like gaps in liquidity, bid-ask spreads, and other types of market inefficiencies. It is increasingly common for scalpers to execute trades on margin or to trade futures contracts to boost their results by using leverage. It makes more sense to hold a larger position size when the percentage price targets tend to be smaller. Generally, this is the case with most day trading strategies.
Despite this, trading with leverage does not negate risk management principles. In order to be successful scalpers, one will have to understand margin requirements and apply the appropriate rules for position sizing. In order to determine their entry and exit points for individual trades, scalpers can use a variety of technical indicators, such as order book analysis, volume heatmaps, and many other indicators.
Scalping is generally considered more suitable to skilled traders due to the fast trade execution and high risk involved with scalping. A few bad trades can also quickly destroy an account due to the extensive use of leverage.
Range trading
A range trading strategy is one that entails analyzing candlestick charts and looking at support and resistance levels to see if there are any opportunities. The term "range trader" refers to a strategy where a trader looks for price ranges within the market structure and creates investment ideas based on those price ranges. As an instance, if a price ranges between a support and resistance level, a range trader may be able to buy the support level and sell the resistance level. Alternately, traders have the option of shorting the resistance level and exiting at the support level.
Essentially, range trading is based on the assumption that the edges of the range will hold their position as support and resistance until the range has been broken. As a result of this, it means that it is more likely that the lower edge of the range will push the price upward, while the upper edge of the range will likely push it downwards.
Nonetheless, whenever the price touches a resistance or support level for a prolonged period of time, the greater is the probability that it will break that level. It is because of this reason that traders who trade ranges will always prepare for the possibility of the market breaking out of the range. A typical stop-loss is usually set at the level where it is confirmed there will be a breakout from the range.
There is no doubt that range trading is a fairly straightforward strategy capable of working for both beginners and experienced traders. The process of trading involves a good understanding of candlestick charts, support and resistance levels, and momentum indicators like the RSI or the MACD.
High-frequency trading (HFT)
There is a type of algorithmic trading strategy, called high-frequency trading (or high-frequency trading), that is usually used by quantitative traders (or quant traders). This type of work entails the development of algorithms and trading bots which would be able to quickly enter many positions and exit them in a short period of time. How short is this time frame? Just a few milliseconds. High-frequency traders may be able to gain a significant lead over their competition with a few milliseconds of advantage.
These algorithms are capable of implementing a wide range of highly complex strategies. The high-frequency trading strategy may seem like a tempting way to make money on the stock market in a day, but the reality is that it's a lot more complicated than it seems. There is a great deal of backtesting, monitoring, and tweaking involved in high-frequency trading in order to meet the ever changing market conditions. Thus, if you think all you have to do is sit back and let a trading bot do all the work, it would be naive to think that would be true.
One other thing to take into consideration is the fact that high-frequency trading is an extremely exclusive industry. As a result of this, the general public does not have any easy access to high-quality information. What are the reasons for this? Well, there are a couple of reasons for it. There is no doubt that if successful trading firms and hedge funds were to share with individual investors the high-frequency trading strategies they were using, those strategies would no longer be viable
.
Further, there is an additional point you should consider when you are dealing with trading bots. When someone has created a profitable trading bot, why would they sell it as opposed to using it? This is the reason why you need to be extremely careful when you are looking to purchase a high-frequency trading bot.
The development of HFT bots requires a deeper understanding of advanced market concepts as well as an acute understanding of mathematics and computer science.
Should I start day trading for a living?
Day trading can be a highly profitable strategy for investors, but you need to take a few things into consideration before you begin. Day trading is a highly stressful, high-demanding business, because it requires fast decisions and quick executions. There are also risks involved in day trading, which is why a solid knowledge of the market is required. Furthermore, it also requires a lot of attention to your screens for long periods of time.
Will you be able to carry all this weight on your shoulders and still risk losing money? Day trading is not for everyone, and you should carefully consider whether or not it will suit your individual investment goals and personality.
You can find a beginner's guide to cryptocurrency trading strategies here, if you are unsure whether day trading is the right strategy for you. The article explains a variety of trading strategies, such as swing trading, that may be appropriate for active traders.