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6 Strategies for Day Trading Crypto (Guide for 2022)

Knowledge Crunch | Monday, January 10, 2022 3:12 PM GMT

Crypto day trading has become a popular form of trading seeing that traders are able to take advantage of daily price fluctuations to make a profit. One benefit of trading crypto is that you can do it whenever you like regardless of time or day. 

These trading strategies consist of the same structures that have been used across financial markets. Seeing that close to 40% of day traders only trade for one month due to failure, individuals interested in day trading would need to know which strategies are more tailored to use when investing, so let's get started!

 

 

Table of Contents

 

What is Day Trading?

 

Can You Day Trade on Crypto?

 

Strategy 1: Copy Trading

 

Strategy 2: Arbitrage

 

Strategy 3: Scalping

 

Strategy 4: Technical Analysis

 

Strategy 5: Range Trading

 

Strategy 6: News and Sentiment Analysis

 

4 Things to Pay Attention to When Day Trading Cryptocurrency

 

 

 

What is Day Trading?

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 of course, cryptocurrency markets. But is day trading cryptocurrency a good idea for you? How do day traders make money? Should you start day trading?

Day trading is a trading strategy that involves entering and exiting positions on the same trading 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 trading strategies to try and profit off of price changes in a financial instrument.

The term "day trader" originates from the stock market, where trading 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.

With day trading crypto came blockchain technology as one of the hottest trends in the financial markets, with the potential to transform traditional business models in a number of sectors.

While blockchain technology was crucial in the development of Bitcoin, it's potential for adaptation to other uses has opened a number of possibilities for investors, both related and distinct from cryptocurrency.

 

Can You Day Trade on Crypto?

There are many techniques day traders use to make gains on short-term fluctuations in the crypto markets. A crypto day trader should devise a winning day trading strategy backed by research, with well-laid plans for when to enter and exit their positions.

For prospective day traders, certain websites allow users to track and copy the most successful traders on the platform. No matter the market, a day trader should have a thorough understanding of crypto as well as trading principles. 

For crypto day traders, high volatility is a necessary evil. The same market condition that scares away buy-and-hold investors is the chaos that makes opportunities for day traders to make a profit. Volatility and liquidity are two elements the day trader needs to actively participate in the crypto market.

Only invest what you're prepared to lose. If you have impeccable risk management skills and nerves of steel, here's what you need to know to get started day trading crypto.

Here are a few crypto trading strategies you could use to understand how to day trade crypto in more detail. 

 

 

Strategy #1: Copy Trading

What if there was an easy way for novice traders to enter the crypto market and capture some of the best opportunities without the trading skills, time, and analysis needed to keep track and manage risk? Enter Copy Trading.

Copy Trading allows traders to copy trades executed by other investors in a financial market. It harnesses the power of social networks and trading platforms together, to provide transparency over positions and performances of traders and the trade on a day to day basis. ZuluTrade sees this as the best strategy.

 

A Winning Strategy

Depending on how you set it up, copy trading could be automated or implemented manually on your preferred crypto exchange. That said, if you’re just starting out or trying to improve your performance in crypto trading, copy trading has many benefits.

We’ve already talked about how much time they can save you by providing a practical way to invest without having to learn how to analyze the markets or interpret signals and indicators. Copying trading benefits can be summarized as follows:

  • Comes in handy for new traders who are often looking for a strategy that works and allows them to gain confidence in trading.
  • Allows you to automate trading. In automatic mode, the software will monitor and copy trades of your preferred signaler.
  • Copy trading supports all types of assets, including forex, stocks and cryptocurrencies.
  • Promotes the creation of a community of traders, where they can exchange ideas and strategies with the aim to improve their trades.

 

 

Strategy #2: Arbitrage

Arbitrage refers to the strategy under which a trader buys crypto in one market and sells it in another. The difference between the buy and sell price is known as ‘spread’. While price differences are typically small and short-lived, the returns can be impressive when multiplied by a large volume.

Owing to the difference in liquidity and trading volume, traders can find an opportunity to book profit. To adopt this opportunity, you need to open accounts on cryptocurrency exchanges such as Coinbase or Binance that show a large difference between prices for the crypto that you are trading at.

 

The types of arbitrage 

Unlike day traders, crypto arbitrage traders do not have to predict the future prices of bitcoin (BTC) and other altcoins. Nor do they enter trades that could take hours or days before profit generation.

By spotting arbitrage opportunities and capitalizing on them, traders expect fixed profit without having to necessarily analyze the market or use other predictive pricing strategies. Also, depending on the resources available, traders can enter and exit an arbitrage trade in seconds or minutes. 

There are several types of arbitrage, including spatial arbitrage, convergence arbitrage, and triangular arbitrage:

Spatial arbitrage: This type of arbitrage involves purchasing crypto from one exchange and immediately selling it on another.

Convergence arbitrage: Here, a trader purchases crypto bought on one exchange and sells it on another exchange. The goal is to see both prices converge, which is when the trader closes both positions.

Triangular arbitrage: This complicated strategy involves trading across more than one trading pair.

 

 

Strategy #3: Scalping

Scalping is one of the most popular crypto day trading strategies to make a profit in the short term. Scalping requires you to make small, short term trades that typically last anywhere from a few seconds to a few minutes. Repeating the process, traders can take advantage of small price changes in markets.

At the same time, you can implement this strategy to leverage both the top and bottom markets. The only limit of this strategy will be your reaction time and the latency of the platform you are using. After all, crypto scalping doesn’t require any technical knowledge and can be used in a wide range of market conditions.

 

Crypto Scalping Tips

Each trader formulates a personal trading system to receive the highest possible profit, but some basic trading principles are shared and used to some extent by any traders. The scalping method is based on real-time technical analysis as the trader has minimal time for fundamental market analysis.

On average, scalpers open positions approximately once every 5-10 minutes. While the M5 timeframe is considered the most preferable as it works with most strategies and is amenable to analysis, thereby increasing the predictability chance.

There are entirely two different approaches to crypto scalp trading - manual and automated. To fully comprehend manual crypto trading, a trader must focus on the market movement diligently and continuously monitor the trades. To profit from an exchange, traders need to track the market movements to open and close the positions in time. 

On the contrary, an automated trading system or trading bots implies that scalpers create a unique program to support their defined strategies. This program is designed to mitigate risks and perform the trades while traders are away from their desks.

Most popular crypto scalping strategies make good use of Tether (USDT) - it's a crypto that is pegged to the US dollar (USD) and is used as a derivative to put into crypto wallets in order to avoid most trading fees.

In most cases, a scalper has to make a trading decision on a specific asset without having time to think about the transaction. At this moment, intuition is the only adviser. Such an approach is called intuitive scalping, and it requires profound experience in trading, analytical abilities, and an excellent understanding of the market.

 

 

Strategy #4: Technical Analysis

Source: Pixabay

Crypto technical analysis involves using mathematical indicators based on previous price action data to try to predict future trends. The basic idea is that markets behave according to certain patterns and that once established, trends heading in a certain direction often continue along the same course for some time.

Broadly speaking, retail investors want to buy when markets are low so they can sell higher at some point in the future, and thus make a profit. Conducting technical analysis before entering a position is one way to try to identify price levels that might be considered high or low.

There’s no single, all-encompassing method for crypto technical analysis. Each trader will prefer to use different indicators and will likely interpret them slightly differently. It should also be noted that no technical analysis is anywhere near 100% predictive.

 

The most prefered Technical Indicators for Crypto

On-Balance-Volume (OBV): OBV is a volume-based technical indicator. It studies the accumulated trading volume of a coin/stock for a set time frame. Simply put, it measures the coin/stock’s buying and selling pressure. 

The OBV is a cumulative total of the trading volume of an asset. It takes into consideration the trading volume of the previous days, weeks, and even months.

 

Accumulation/Distribution Line: We move forward with another popular volume-based indicator which is the accumulation/distribution line. It is used to assert the trend direction of an asset based on the relationship between its price and trading volume. 

The A/D line measures the flow of money into and out of an asset. This is used to determine if an asset is being accumulated or distributed. Generally, accumulation implies the buying levels of the asset and distribution denotes the selling levels of the asset.

 

Average Directional Index (ADX): After two volume-based indicators, we move on to our first trend-based indicator i.e. Average Directional Index (ADX). As the name suggests, the key technical measure here is the direction/trend of the asset. It is represented using: 

Positive directional indicator or +DI — when the trend is upward.

Negative directional indicator or -DI — when the downtrend is taking place.

ADX with its accompanying two indicators measures the strength of the current trend of the asset. Based on this strength, traders/investors can place their bets on whether to long or short the asset.

 

Stochastic Oscillator: The final trading indicator on the list is a momentum indicator called Stochastic Oscillator. It was developed to follow the momentum or speed of the price. This was derived from an accepted rule i.e. momentum changes direction before price. 

This indicator oscillates between the range of 0 to 100, measuring the momentum of the asset. With regards to the timeframe, 14-period is the general rule which can be 14 days, weeks, or even months depending on the analyst’s goal. 

 

 

Strategy #5: Range Trading

This strategy assumes that prices move within a specific range. Traders using this strategy observe candlestick charts, as well as support and resistance levels. This may result in buying when prices reach support levels, and selling when prices reach a resistance level. 

Cryptos will constantly define a range they are trading in. Generally, this range will be a type of consolidation (either accumulation, big players getting more coins for the next leg up, or distribution, selling coins at a high before the big players let the market drop).

When you have a range you have clear support and resistance, so trading it makes sense. While others trade the breakout or breakdown, you focus on making profitable and predictable trades in the current range.

This can be a type of day trading or intraday trading, but the goal is to trade the range, not to buy into an uptrend, or buy after a downtrend, etc.

Traders should keep in mind that a limitation of this strategy is that assets will break out of the range at some point. A vital part of this strategy is pivot points. If traders are able to calculate the pivot points, they would have a more informed perception of what price levels will experience. 

Trading Range Strategies

 

Support and Resistance

To correctly interpret price charts and trade successfully, traders must identify and measure the support and resistance’s strength. A downtrend can be interrupted or reversed at the support level where the buying is strong. Horizontal or near-horizontal lines connecting several bottoms are used to represent support.

Also, a downtrend can be interrupted or reversed at the resistance level where selling is strong. Horizontal or near-horizontal lines connecting several tops are used to represent resistance.

Factors such as height, length, and trading volume at a specific zone determine the strength of support and resistance of regions. Therefore, a security in a range-bound market can either be bought when the price approaches a support level or be sold when the price reaches a resistance level.

 

Breakouts and Breakdowns

A breakout from a trading range can also offer traders an opportunity to enter a range-bound market. Traders would need to confirm the entry using indicators such as price or volume action.

For example, there should be an increase in volume outside the trading range on the initial breakout. Traders may choose to wait for a retracement before entering the market rather than going after the price.

 

Trading Set-Up

Range trading seeks to exploit the price action between the support and resistance levels. After identifying favourable market conditions, a trader can purchase a security near or at the overbought zone and sell near or at the oversold level.

Long-term success in a trading range would require a trader to enter the market where the stop loss is lower and the profit target is higher. The strategy can work well in a trending financial market.

 

 

Strategy #6: News and Sentiment Analysis

While it’s less popular among short-term traders, looking at headlines and overall market sentiment can also be used in Bitcoin day-trading. Sometimes, big news items can move crypto markets quickly.

For example, on the day this article was written in mid-April 2021, the nation of Turkey announced that it would ban Bitcoin and other cryptocurrencies as payment options within its borders. This sparked a global crypto market selloff, with Bitcoin falling about 3.2% initially and more than 10% later.

Additionally, some websites attempt to track the sentiment of the most popular cryptocurrencies by analyzing Twitter chatter. More positive tweets about certain crypto assets equals more bullish sentiment, while more negative tweets equal more bearish sentiment—or so the theory goes.

 

Sentiment Analysis In Cryptocurrency

Cryptocurrency Fear & Greed Index

One of the most popular cost-free sentiment analysis indicators in cryptocurrency is the Fear & Greed index. The Fear & Greed index for crypto is modeled after the Fear & Greed index for the stock market.

The Fear & Greed index for cryptocurrency is created using an aggregate of measures that are also worth looking at separately. These are market volatility, trading volume, social media sentiment, Bitcoin dominance, and Google search trends.

Now, the Fear & Greed index is useful for trading on longer time frames. By that, we mean a day or more. This is because the Fear & Greed index is only updated once each day. In terms of how to trade using this indicator in the words of Warren Buffett quote be greedy when others are fearful and be fearful when others are greedy.

 

Bitcoin Bull & Bear Index

Another popular cost-free sentiment analysis indicator in cryptocurrency is the Bull & Bear index created by Augmentin. In contrast to the Fear & Greed index, the Bull & Bear index focuses exclusively on Bitcoin sentiment on social media platforms, specifically Bitcointalk.org, Reddit, and Twitter.

More importantly, the Bull & Bear index is updated every hour which makes it more suitable for active day trading. As you can see the index also includes a chart that shows you how sentiment is looking on each social media platform in addition to their aggregated sentiment. (Think of Elon Musk and his love for Dogecoin)

What’s cool about the Bull & Bear index is that it doesn’t just track sentiment, but also tracks the hot topics being discussed on all of these platforms. These can be seen by hovering your mouse over the graph. There are two ways you can use the Bull & Bear index for trading. Either you can use the same strategy of being greedy when the market is fearful and being fearful when the market is greedy or you can do the exact opposite.

 

 

4 Things to Pay Attention to When Day Trading Cryptocurrency

First of all, you need to understand that profitable trading requires a lot of attentiveness; it isn’t a gamble and nor should it ever be one. Other than the following 4 tips, ensure that you pay close attention to the market forces of demand and supply to be able to know when this or that tip applies. 

It is paramount to internalize every tip in this guide and to understand the reasoning behind it. So let’s get stuck in and take a look:

 

Tip #1: Manage Your Risks

The rule of thumb in crypto trading is: Do not risk more than you can afford to lose. Given the gravity of risk in crypto trading, you’ll need to make sure you know what you’re doing. Seeing as crypto trading is a fairly new concept in the world of investing, it can come with high risk possibilities.

Research important crypto coins: Before investing in any cryptocurrency make sure you research it and invest as per your capacity. Investing just because you’re feeling left out or without consulting any investment advisor isn’t advisable.

Understand your reward/risk ratio: The reward to risk ratio is how much you stand to profit for every unit of currency you risk. Invest only that much which you are ready to risk.

 

Tip #2: Have a motive for entering each trade

This may sound obvious but you need to have a clear purpose for getting into the cryptocurrency trade. Whether your purpose is to day trade or to the scalp, you need to have a purpose for starting to trade cryptos. Trading digital currencies is a zero-sum game; you need to realize that for every win, there is a corresponding loss: Someone wins -  someone else loses.

The cryptocurrency market is controlled by the large ‘whales’, pretty much like the ones that place thousands of Bitcoins in the market order books and you can guess what these whales do best? They have patience; they wait for innocent traders like you and me to make a single mistake that lands our money in their hands due to avoidable mistakes.

Whether you are a day trader or scalper, sometimes you’re better off not gaining anything on a certain trade than rushing your way into losses. From our years of market analysis, we can comfortably tell you that on certain days or periods, you can only stay profitable by keeping off some trades.

 

Tip #3: Diversify

Investments are unpredictable; even those that seem to offer infinite positive returns can come crumbling down under certain economic conditions. Cryptocurrencies are even more unpredictable.

As much as you can reap profits in thousands in a day or less, the opposite is also true. You can lose everything you invest in digital assets in a flash of a second. So, the best way to get past such uncertainties is through diversification.

Bitcoin shot up in value in the shortest time, more than anything in the history of any known investment. The truth is, billionaires were made; and what most people never seem to understand is that a lot of people also lost money. In the midst of all this, the currency managed to grow its market cap by over thirty times more in the past year alone.

 

Tip #4: Don’t Buy Simply Because the Price is Low

Most beginners make one common mistake: buying a coin because it’s price seems to be low or what they consider affordable. Take, for example, someone who goes for Ripple instead of Ethereum simply because the latter is much cheaper.

The decision to invest in a coin should have very little to do with its affordability but a lot to do with its market cap.

Just like the conventional stocks are gauged by their market caps, which is evaluated using the formula Current Market Price X Total Number of Outstanding Shares, the same applies to cryptocurrencies.

There is no difference between having a coin priced at $10 per coin with a total number of 1 million shares in the market and the same coin being priced at $100 with 100,000 shares in the market. For this reason, it is more justifiable to use a coin’s market cap to decide whether or not to invest in it than using its price. The higher a coin’s market cap, the more suitable it is for investment.


<H2> Now Over to You

As you can see there are many strategies out there for day trading cryptos. All of them work differently, so you just need to find the one that works best for your goals.

Although it can be extremely profitable, day trading can also create large losses. The range of strategies mentioned are all equipped to create profits for traders if used correctly. To find a strategy or strategies, day traders need to explore and research all options to discover which strategies suit their goals.

We hope you enjoyed this edition of the knowledge crunch blog just as much as we enjoy writing them! Stay tuned for more and be sure to check out our other helpful blogs with advice and tips to reach your investment goals with ZuluTrade. 

 

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Disclaimer: The views expressed do not constitute investment or any other advice/recommendation/suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in this article do not represent the opinion of ZuluTrade Social Trading Platform and do not constitute an offer or invitation to anyone to invest or trade. Every metric and the statistical number is a result of a past performance which does not constitute a promise or a certainty for a future one.

Frequently Asked Questions (FAQs)

 

Q1. Do day trading rules apply to cryptocurrency?

A day-trade is considered to occur when you buy and sell the same security (e.g. stocks, ETFs) on the same market day. The Pattern Day Trader rule, as defined by FINRA or the SEC, does not apply to crypto trades as there are no limitations on day-trading cryptocurrencies.

Q2. How do you day trade crypto with leverage?

Leverage Trading in Crypto denotes a tool that allows investors to make spot transactions (purchase and sale) with the help of borrowed capital from brokers. Usually, these funds exceed the account balance of the investors. Therefore, it is a perfect way of maximizing profits by increasing purchasing ability. And the best part of this trading is that the investor can opt for this trading with a small amount of money.

Q3. What is the margin in cryptocurrency trading?

Leverage Trading in Crypto denotes a tool that allows investors to make spot transactions (purchase and sale) with the help of borrowed capital from brokers. Usually, these funds exceed the account balance of the investors. Therefore, it is a perfect way of maximizing profits by increasing purchasing ability. And the best part of this trading is that the investor can opt for this trading with a small amount of money.

Q4. How much money do you need to start day trading cryptocurrency?

Certain brokers available with ZuluTrade require a minimum deposit of just $1 to trade crypto, others may require $300, £210, €250, 25,000 JPY or 300 AUD. This purely depends on the brokerage that you choose to trade with.

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