Day trading is an avenue many professionals use to supplement their profits. However, much like any other type of trading, it comes with various risks. Day trading crypto comes with heightened risks due to how volatile the asset is daily. This is something we will be discussing in greater detail today.
You may hear about short-term trading strategies, such as scalping, or long-term strategies, such as swing trading. Day trading is slightly different as it is a broader term. You can apply these strategies across a range of markets so that you can swing trade forex, and you can also scalp trade forex.
Cryptocurrency is different as it faces a different oversight than more established markets. Although the SEC in America seeks to provide more clarity for many cryptocurrencies, it doesn’t have the same rules and regulations as stocks or forex trading. For many, this is the leading factor that causes the volatility.
The SEC has gone after some legitimately suspicious operators in the space, such as Do Kwon. However, they have also aimed at prominent innovators, such as Ripple Labs, who created XRP. We will explore these components today to determine whether day trading crypto is profitable or simply too risky.
Does Buying And Selling Crypto Count As Day Trading?
This may sound obvious, but if you complete your purchase and sale within the same day, this is the textbook definition of day trading. When day trading crypto, this may be slightly more open to interpretation as it is a 24-hour market. So long as you execute your position within the same day, irrespective of your strategy, this would be considered day trading.
If you have decided to start day trading crypto, the next natural question from this point is, “what is the best crypto for day trading?” – a question many new traders ask themselves. Although there are more prominent cryptocurrencies such as Bitcoin and Ethereum, some traders believe the smaller cap cryptocurrencies offer a better opportunity to day trade.
However, the most imperative thing to do when day trading crypto is to understand your asset and risk managing any trade you enter.
Do Research & Manage Risk
It doesn’t matter whether you are an institutional investor who deals with billions of dollars, such as an investment bank, or a retail investor trading with a few hundred dollars of your savings, such as a retail trader. Ultimately, if you do not research the asset you are investing in, you are gambling. Likewise, you are not performing adequate due diligence and preparation if you do not manage risk appropriately.
Crypto day trading isn’t a guaranteed way to print money. No method of trading is, unfortunately. We would all love a crystal ball to perform our trades, but that’s not how life works. The only way to profit in this industry is to commit vast amounts of research and manage your risk effectively when in a live position.
Even then, your capital is always at risk. Just because you understand the market doesn’t mean you will make money. This is something many professional investors understand. Crypto day trading strategies differ, but one thing they should all have in common is that the trader behind them ensures they manage risk.
Effective Risk Management
There are several variables to weigh up to manage your risk effectively. It doesn’t just involve finding the best crypto exchange for day trading. This will not impact you negatively, but it is just one of many things you should do. There are two critical components to a solid risk management strategy:
- Dollar cost averaging
- Stop loss and take profit limits
Dollar cost averaging is when you continue to purchase your asset even if it depreciates. For example, let’s say you buy Ethereum at $1,000, and it then drops to $500, so you buy another one. Your average entry price is $750 – so if the price breaks above $1,000 again, you profit. This example may be better suited to long-term strategies, but it works for day trading, too, if the asset is volatile. It doesn’t get much more volatile than cryptocurrency.
Stop Loss & Take Profit Limits
Stop loss and take profit limits are measuring tools you set yourself to prevent loss or take profit. Negative emotions are critical in how much money you can lose whilst trading. If you set up a take profit and stop loss, you don’t need to be glued to the charts 24/7. If you’re looking for the best crypto platform for day trading, look for a service that offers the facility to set up stop loss and take profit limits. There are several reputable exchanges online that all offer this facility.
While day trading crypto happens over a certain period, you’ll be surprised how quickly an asset can hit these limits, given the volatility of digital assets. In addition, if your trade is going well, some people can allow positive emotions to hinder their strategy. For example, if Bitcoin flies up 10% in 24 hours, more often than not, it will be due a sharp retracement.
People will hold, hoping for a higher price. Some will jump in at the peak in fear of missing out and getting hit by the retracement. Therefore, market knowledge is critical.
Research Your Asset
If you are trading cryptocurrency, you must understand cryptocurrency and the individual asset you are trading. There are dozens of cryptocurrencies with a variety of utilities. However, some don’t offer any utility, which means they are a much riskier investment.
Once you have researched digital assets properly, you will understand this is commonplace. Many cryptocurrencies get into the top 20 by market cap with little or zero utility. As a beginner, research is pivotal.
Once you have this information, you can build an effective strategy. There isn’t one crypto day trading strategy that will help you more compared to another. Having a good knowledge of the way cryptocurrency works is an essential foundation.
As well as performing the necessary research, you must also understand the market. Broader market indicators include economic news that causes the price of cryptocurrencies to fluctuate. In essence, central policies shouldn’t impact cryptocurrencies as much as they do, but they do, and you need to be aware of this.
However, many prominent institutions and billions of dollars are now involved in the industry. As a result, central factors are starting to have a more significant impact. This includes a rise in interest rates, issues with inflation or general negative economic sentiment. One example of this is the cost of living crisis which contributes to cryptocurrency prices in a big way.
How To Pick Crypto For Day Trading
Regarding day trading crypto, you want to pick a strategy that works instead of a specific currency. For example, many people have made a lot of money trading Bitcoin. However, now that it is a multi-billion-dollar asset, the possibility of return is lower than some cryptocurrencies with smaller market caps.
Ultimately, the volatility is where the potential for profit increases. However, what goes up must come down and it works the same way. You can find plenty of stories online about investors and traders who have made a lot of money day trading crypto and then lost it all in a small timeframe. This can be through lousy strategy or just from not knowing what they’re doing in the first place.
Is Day Trading Crypto Worth It?
There are a variety of strategies that will facilitate making money in trading. Day trading crypto is worth it if you know what you’re doing; that’s the bottom line. Unfortunately, many people do not follow or understand the logic behind strategies or market movements and leave themselves open to significant financial loss.
The best crypto day trading platform usually has high volume and low fees. However, different exchanges will have slightly additional fees. So it depends on the type of day trading crypto strategy you are using or the instrument you’re looking to implement. This includes tools or trading methods such as futures or options, so it is vital to perform this prior research.
You need to know your capital is at risk, and even with vast knowledge, you are not guaranteed to make money. However, while there aren’t any day trading rules for crypto, so long as you apply the variables we have touched on today, you could begin to devise a strategy.
While risk management strategies are always recommended, are there any day trading rules for crypto? The answer is not really. People who make money day trading crypto use different tools, strategies and amounts of capital.
If you are in a fortunate enough position to make money from day trading crypto, then day trading crypto taxes are something you should look into. Other markets, such as forex, have rules for paying taxes. Finding out what regulations apply to your region before you begin day trading crypto is crucial.