Volatility is one of the main reasons traders are attracted to crypto markets. The rapid price fluctuations associated with most cryptocurrencies offer traders multiple opportunities to enter and exit positions within short periods.
Day trading, a short-term trading approach involving opening and closing multiple positions within a single day, is perfectly suited to assets with constantly changing prices.
However, despite the opportunities that such volatility offers, it is crucial to manage the many risks involved with day trading, especially considering the steep learning curve. In this guide, we will examine many of the concepts and strategies associated with day trading.
What is Day Trading?
Day trading, also referred to as intraday trading, involves executing multiple transactions within the same day. The term originates with the stock market and refers to short-term traders who open and close their positions before the market closes. As prices move throughout the day, these traders analyze all the activity to identify lucrative opportunities.
While the concept is much more widely known today, in the 1860s, day trading was only reserved for brokers who had easy access to the market. The many entry barriers that existed at the time made day trading impractical for most people as they had no easy way of initiating trades. Modern technological advancements have simplified financial markets giving more traders a chance to participate with the click of a button.
However, unlike the stock markets, crypto markets do not close. Therefore, traders can enter and exit the market at any time. Also, cryptocurrencies with high volatility have created very profitable opportunities for those with the right skills.
How to Get Started With Day Trading
As mentioned above, day trading is focused on intraday market movements. To profitably capture these short-term moves, traders must familiarise themselves with concepts such as liquidity, volatility, and trading volume.
What is Liquidity?
Liquidity refers to how easily one can enter and exit a position. In other words, it is a measure of how many buyers and sellers a specific market has. It’s an absolute necessity for day traders to choose assets with enough liquidity to easily allow for the many operations they will perform each day.
What does Volatility mean?
Volatility refers to how rapidly the price changes within a specified time frame. Financial instruments with high daily volatility will offer day traders the most opportunities to make quick profits from small movements.
Trading volumes measure how much or how often assets are sold or traded within a specified time. Assets with higher trading volume have more activity and are therefore ideal for day trading.
Picking the Best Crypto Exchanges for Day Trading
The best crypto exchange to day trade Bitcoin or any other cryptocurrencies is one with a good reputation, security, trading volume, and liquidity. Because most exchanges in the crypto space are unregulated, it is essential to carefully select an exchange that is trustworthy and dependable. Phemex has all of these qualities and more. Though Phemex, users can day trade spot cryptocurrencies with zero fees or perpetual contracts with up to 100x leverage.
Once you create an account within minutes, the next step is to purchase some Bitcoin or any other crypto. Phemex offers multiple payment channels that allow you to pay with bank cards, transfers, or ApplePay.
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How to Analyze The Crypto Markets
Market analysis is crucial as it is what allows traders to determine an asset’s price movements. There are two common types of analysis techniques used by traders: technical analysis and fundamental analysis.
Technical analysis operates on the principle that historical price movements will likely dictate current and future movements. A technical analyst will examine market charts to identify patterns. With the help of other technical indicators that measure characteristics such as changes, momentum, and volume, technical analysis can yield obvious signals to help traders decide the type of positions they need.
On the other hand, a fundamental analyst will consider the intrinsic value of an asset based on news and economic factors surrounding the project as a whole. Other factors taken into consideration include the underlying technology, innovations, and the management team. For instance, a Bitcoin day trader may enter the market after important news involving either the purchase or sale of bitcoin by a large institutional investor.
Crypto Day Trading Strategies
How profitable a day trader is depends on how proficient they are with the multiple strategies associated with this approach. Below we highlight some of the more common strategies for day trading.
Scalping is an incredibly short-term strategy that involves making small but frequent gains instead of large sums over long periods. The strategy requires the trader to analyze charts and determine opportunities to enter and exit the market within minutes or even seconds.
For example, suppose a trader identifies a short-term ranging pattern. In that case, they may choose to long at support levels and close their positions even before reaching the resistance level (or vice versa) to minimize risk and maximize the potential of at least a small profit.
Because crypto markets are extremely volatile, scalping requires a strict exit strategy while also considering all transaction and funding fees. A trader must ensure that their small profits will exceed the fees being paid with every transaction in the long run.
Trend trading is a strategy used to capture gains from an asset’s price momentum in a particular direction. If an asset is posting a succession of higher highs i.e., the overall direction is up; the trader will take a long/buy position, hoping to ride the upward trend as much as possible.
This strategy is not exclusive to day trading as it can be used to keep a position open for an extended period, especially if the trend continues for weeks and months. Nevertheless, day traders may still opt to close their positions within a single day to minimize their overnight risks. Another alternative is to set take profit or stop loss instructions to automate decisions when the trader is sleeping. Traders that rely on trends use many technical indicators such as the Average Directional Index (ADI), MACD, Stochastic Oscillators, and the Relative Strength Index (RSI) to measure an asset’s momentum.
This strategy uses moving averages (a technical analysis indicator) to determine whether an asset’s price has had a significant or unusual deviation from its average. The mean reversion strategy is based on the statistical and economic principle that explains how extreme events (such as volatile price movements in the market) tend to even out over time.
A trader that employs the mean reversion strategy will bet that the price will revert to its historical mean or average. Using moving averages on market charts, a trader can recognize a signal indicating the price is about to bounce back to its historical average. Money Flow is another indicator that shows when the market is overbought or oversold and is often used by day traders to determine entry and exit points.
Additional Day Trading Tips
Without a doubt, the best way to learn day trading is to practice using a demo account constantly. Phemex offers a simulated trading market that allows you to practice your strategies without using real money. Self-education through books and courses is also a great way to improve your day trading skills. The more you learn, the better prepared you will be for the market.
As you’re developing your own system, it’s good to mix both technical and fundamental analysis to see what style suits you better. Once you have a plan and a clear hypothesis, be disciplined, and stick with your plan until the end. Do not let emotions influence your decisions and only refine your system after you’ve diligently recorded your results.
Because day trading involves multiple transactions a day, perhaps the most critical thing to learn first is proper risk management techniques. It is impossible to predict the markets with 100% accuracy, and even the best of traders will experience losses. Never risk more than what you can afford to lose. For more information and useful trading knowledge, follow Phemex Academy.