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 cryptocurrency markets. But is day trading cryptocurrency a good idea for you? How do day traders make money? Should you start day trading?
Unfortunately, there’s not a single answer to those questions, but this article will explain what you need to know before you start day trading crypto.
What Is Day Trading?
It is a strategy involving entering and exiting positions on the same day. Since the trading happens within the same day, this strategy may also be referred to as intraday trading. The goal of day traders is to use intraday strategies to try and profit off price changes in a financial instrument.
The term “day trader” originates from the stock market, where it is open only during business days of the week. In this context, day traders never leave positions open overnight since they aim to capitalize on intraday price movements.
How Do Day Traders Make Money?
Successful ones will have a deep understanding of the market and a good chunk of experience. They typically use technical analysis (TA) to create trade ideas. They will usually use volume, price action, chart patterns, and technical indicators to identify entry and exit points for trades. Risk management is essential for success in day trading, as with any trading strategy.
As actual events may take a long time, they may not concern themselves with fundamental analysis (FA). Even so, someday, traders base their strategy around “trading the news.” This involves finding assets with high volume thanks to a recent announcement or piece of news and taking advantage of the temporary spike in trading activity.
It aims to profit off of market volatility. As such, volume and liquidity are crucial for day trading. After all, they need good liquidity to execute quick trades. This is especially true when it comes to exiting a position. A considerable slippage on just one trade can devastate a day trader’s trading account. This is why day traders will typically trade highly liquid market pairs.
Some of them will only trade one market pair, such as BTC/USDT. Others will create a watchlist based on technical or fundamental attributes (or both) and choose what instrument to trade from that list. Learn more about day trading at bitcode-prime.cloud.
Day Trading Strategies
Scalping is an overall trading strategy. It involves taking advantage of small price moves in short time frames. These can be gaps in liquidity, the bid-ask spread, and other market inefficiencies.
Scalpers often trade on margin or futures contracts to amplify their results with leverage. Since the percentage price targets tend to be smaller, larger position sizes make more sense. This is generally true for most day trading strategies.
However, trading with leverage doesn’t mean risk management principles go out the window. A successful scalper will know margin requirements and apply proper position sizing rules.
Scalpers may use strategies such as order book analysis, volume heatmaps, and many technical indicators to define their entry and exit points for individual trades. However, due to the fast trade execution and high risk, scalping is generally more suitable for skillful traders. In addition, due to the extensive use of leverage, a few bad trades can quickly blow up a trading account.
Range trading is a simple strategy involving candlestick chart analysis and looking at support and resistance levels. As the name suggests, they look for price ranges within the market structure and create trade ideas based on those ranges. For example, if the price ranges between a support and resistance level, they could buy the support level and sell the resistance level. Conversely, they could short the resistance level and exit at the support level.
The idea of it is based on the assumption that the edges will hold support and resistance until the range is broken. This means that the lower edge of the range will likely push the price up, while the upper edge will likely push the price down.
However, the more time the price touches a support or resistance level, the more likely the level will break. This is why range traders will always prepare for the chance that the market can break out of the range. Typically, this means setting a stop-loss at a level where the breakout from the range is confirmed.
It is a relatively straightforward strategy that can be suitable for beginners. It requires a good understanding of candlestick charts and support and resistance levels and may involve momentum indicators such as the RSI or MACD.
High-Frequency Trading (HFT)
High-frequency trading is a type of algorithmic trading strategy typically used by quantitative traders (“quant” traders). It involves developing algorithms and trading bots that can quickly enter and exit many positions over a short amount of time. How short are these time frames? Think milliseconds. A few milliseconds of advantage for a high-frequency trading firm may provide a significant lead over other firms.
HFT algorithms may be created to implement highly complex strategies. While high-frequency trading may look like a tempting day trading strategy, it’s much more complicated than it may seem. High-frequency trading includes a lot of 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 for you, that’s probably far from the truth.
Another thing to consider is that high-frequency trading is quite a whole industry. As such, high-quality information is complex for the general public. Why is that? Well, it’s pretty simple. If successful trading firms and hedge funds started sharing their high-frequency trading strategies with individual investors, those strategies wouldn’t work.
Also, there is an additional point you should consider regarding trading bots. If someone has built a profitable trading bot, why don’t they use it instead of selling it? This is why you need to be especially careful when thinking of purchasing a high-frequency trading bot.
Developing HFT bots requires understanding advanced market concepts and acute knowledge of mathematics and computer science. As such, it’s more suitable for advanced traders.
Day trading is a commonly used strategy in stock trading, just as well as in cryptocurrency. Day traders use intraday trading strategies to try and profit from market volatility and will typically not stay in positions for more than one day.