Day trading is one of the most widely used trading strategies. Day traders are active in most financial markets, such as stocks, forex, commodities and of course cryptocurrency markets. But is day trading cryptocurrencies a good idea for you? How do day traders make money? Should you start day trading?
Unfortunately, there isn't an easy answer to these questions, but this article will tell you what you need to know before you start day trading cryptocurrencies.
What is day trading?
Day trading is a trading strategy that involves entering and exiting positions on the same trading day. Since trading takes place within the same day, this strategy can also be used as a Intraday trading are designated. The goal of day traders is to try intraday trading strategies to profit from changes in the price of a financial instrument.
The term "day trader" comes from the stock exchange, where trading is only open on working days of the week. In this regard, day traders never leave positions open overnight as they seek to capitalize on intraday price movements.
How do day traders make their money?
Successful day traders have a deep understanding of the market and a good deal of experience. Day traders typically use technical analysis (TA) to develop trading ideas. They typically use volume, price action, chart patterns, and technical indicators to identify entry and exit points for trades. As with any trading strategy, risk management is essential to day trading success.
Because fundamental events can take a long time to complete, day traders may not be concerned with Fundamental Analysis (FA). Still, there are some day traders who base their strategy on "trading the news". The point is to find high volume assets thanks to a recent announcement or news item and take advantage of the temporary surge in trading activity.
Day traders aim to take advantage of the volatility of the market. Hence, volume and liquidity are critical to day trading. After all, day traders need high liquidity to execute quick trades. This is especially true when it comes to exiting a position. A large slippage on just one trade can have a devastating effect on a day trader's account. For this reason, day traders typically trade with highly liquid market pairs.
Some day traders will only trade with one market pair, such as BTC / USDT. Others create a watchlist based on technical or fundamental characteristics (or both) and select the instrument to trade from that list.
Day trading strategies
Scalping is a very common trading strategy among day traders. It involves taking advantage of small price movements that take place in short periods of time. These can be liquidity gaps, the bid-ask spread, and other market inefficiencies.
Scalpers often trade on margin or futures contracts to leverage their results. Since the percentage price targets tend to be smaller, larger position sizes make more sense. In fact, this is generally the case for most day trading strategies.
However, leverage trading does not mean that the principles of risk management are completely disregarded. A successful scalper will be aware of margin requirements and use the correct rules for position sizing. If you're looking for a simple formula for position sizing, read on How to calculate position size when trading.
Scalpers can use strategies such as order book analysis, volume heat maps, and many technical indicators to define their entry and exit points for individual trades. However, due to the quick execution of trades and the high risk involved, scalping is generally more suitable for experienced traders. Additionally, due to the extensive use of leverage, a few bad trades can quickly wipe out a trading account.
Range trading is a simple strategy that heavily involves analyzing candlestick charts and looking at levels of support and resistance. As the name suggests, range traders look for price ranges within the market structure and develop trading ideas based on these ranges. For example, if the price moves between a support level and a resistance level, a range trader 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 range trading is based on the assumption that the edges of the range hold as support and resistance until the range is broken. This means that the lower edge of the range is likely to push the price up, while the upper edge of the range is likely to push the price down.
However, the longer the price hits a level of support or resistance, the more likely it is that that level will be broken. Because of this, range traders will always prepare for the chance that the market can break out of range. Typically this means setting a stop loss at a level that confirms the breakout of the range.
If you want to read more on this subject, have a look The basics of support and resistance at.
Range trading is a relatively straightforward strategy that can be suitable for beginners. It requires a good understanding of candlestick charts and the levels of support and resistance, and can incorporate 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 ("quant") traders. It includes the development of algorithms and trading bots that can enter and exit many positions in a short period of time. How short are these periods? Think in milliseconds. A benefit of a few milliseconds can give a high frequency trading company a significant head start over other companies.
HFT algorithms can be created to implement highly complex strategies. High frequency trading may look like a tempting day trading strategy, but it is much more complicated than it might seem. High frequency trading involves a lot of back testing, monitoring and optimizing algorithms to adapt to the ever changing market conditions. So if you think you can just sit back and relax while a trading bot does all the work for you, that's probably far from reality.
Another thing to keep in mind is that high frequency trading is quite an exclusive industry. Therefore, high quality information is difficult to come by for the general public. Why is that? Well, it's very easy. If successful trading firms and hedge funds shared their high frequency trading strategies with individual investors, those strategies would no longer work.
Also, there is one additional point to keep in mind when it comes to trading bots. If someone has built a profitable trading bot, why not just use it instead of selling it? This is why you need to be extra careful when thinking of buying a high frequency trading bot.
The development of HFT bots requires, in addition to advanced knowledge of mathematics and computer science, an understanding of advanced market concepts. As such, it is more suitable for advanced traders.
How to start day trading cryptocurrencies
So you've decided that you want to try day trading cryptocurrencies. Where should you start?
You could yourself A Complete Guide to Cryptocurrency Trading for Beginners where we explain everything you need to know about trading cryptocurrencies, as well as some tips for individual investors. Once you are familiar with the basic concepts, you can start paper trading on the Binance Futures Testnet. This way you can test your trading system first without risking real money.
But what is the best online trading platform for day trading cryptocurrencies? Well, we can't decide for you, but the Binance ecosystem offers hundreds of market pairs, margin trading, quarterly and perpetual futures, leveraged tokens, real-time market data, and much more. Just go to Binance, convert your fiat currency to cryptocurrency, and get started right away.
Should I be day trading for a living?
Day trading can be a highly profitable strategy, but there are a few things to consider before getting started. Since day trading requires quick decisions and execution, it can be very stressful and demanding. Day trading can also be quite risky and requires a solid understanding of the market. Of course, it will also require you to look at screens for extended periods of time.
Are you able to handle all of the weight on your shoulders and potentially lose money in the process? You will need to carefully consider whether day trading suits your individual investment goals and style.
If you're not sure if day trading is the right strategy for you, take a look at the Beginner's Guide to Crypto Trading Strategies (A Beginner's Guide to Cryptocurrency Trading Strategies). In this article, we will explain many different strategies that may be suitable for active traders, such as swing trading. Once you become familiar with these strategies, you can make better choices in trying to find your trading style.
Day trading is just as common a trading strategy in stock trading as it is in cryptocurrencies. Day traders use intraday trading strategies to take advantage of market volatility and typically don't stay in their positions for more than a day.
Day traders use technical analysis, chart patterns, and technical indicators to identify trade setups. The most common day trading strategies include scalping, range trading, and high frequency trading.
Still want to learn more about day trading? Check out our Ask Academy Q&A platform, where you can get answers to your questions from the Binance community.