How to Day Trade Cryptocurrencies: The Complete Guide

Mark Brown
bitcoin profit

Cryptocurrencies have had a wild ride since the advent of the first token, Bitcoin, in early 2009. At first, very few people showed interest, however, once the revolutionary potential of the blockchain technology began to come to light, the Bitcoin market started to really take off. Bitcoin appreciated rapidly and finally reached a historical high of just under $20,000 at the end of 2017. At the same time, the rest of the cryptocurrency market also reached historic highs along with Bitcoin. Many of those who were able to enter the market early, found themselves exceptionally wealthy, earning a huge return on their investments. However, since then, the cryptocurrency markets have come off historic highs and they are currently experiencing significant volatility. Although the heightened volatility comes with increased risk, it also comes with increased potential reward. The dramatic intraday price fluctuations in the cryptocurrency market lends itself well to cryptocurrency day trading strategies. Let us explore this in more detail.

What is Day Trading?

Day trading is a short-term investment strategy which involves buying and selling assets in the financial markets for profit. In this type of strategy, you will usually only hold the position in the market for a single day. However, there may be times when you end up holding a trade for a few days longer.

The increased volatility in the cryptocurrency markets provides excellent opportunities to make money from the price fluctuations. The larger the peaks and valleys of the price changes, the larger the difference between your buy and sell points. This means you will earn more profits for winning trades.

On the other hand, without a solid trading strategy and plan, the volatility could cause serious losses. Therefore, before you start risking capital on cryptocurrency day trading, you should make sure to carefully craft a trading plan that works for your own risk tolerance and trading preferences.


What is a Day Trading Plan?

It is essential for you to create a well-thought-out cryptocurrency day trading plan if you are planning on making consistent profits while minimizing the risk of loss. Without a solid trading plan, you run the risk of having your emotions control your trading decisions instead of logic and reasoning. Greed can make you hold onto a trade for too long, ultimately resulting in a loss. Fear can also cause you to close a trade too soon before it becomes profitable.

A trading plan is designed to overcome your emotional and irrational tendencies that are innate in human beings. In order for a trading plan to be effective, you will need objective rules which tell you exactly what to look for in deciding when to buy and sell. In this way, you will know precisely why you are entering and exiting a trade based on objective reasons.

On the other hand, even with a solid strategy, the cryptocurrency markets can be highly unpredictable, and you never know how the markets will behave. Therefore, there is some risk of financial loss when trading cryptocurrencies. This is why your trading plan should have some way to minimize your risk of loss.

Here are some of the advantages of creating a day trading plan:

  • Avoids emotional trading
  • Minimizes risk
  • Decisions are made based on objective reasoning and market analytics
  • Consistency
  • Clarity
  • Measurable performance evaluation


What Makes Cryptocurrencies Great for Day Trading?

Cryptocurrencies are perfect for day trading because the volatility provides many profit opportunities. One reason is that the cryptocurrency markets are not as developed as stock markets. This means there are not as many traders and also fewer experienced and knowledgeable traders. As a result, there are usually more price discrepancies which could be exploited to earn real profits.

Another reason is due to volatility. When the market starts to move up or down, the fluctuations can really garner serious momentum. This means, if you have a trade going in the right direction, you can make plenty of profit very quickly. Cryptocurrency markets have more than five times the volatility of other asset classes which are considered more traditional, such as stocks. There is a standard daily deviation of 5% in the cryptocurrency markets.

Also, because there are fewer participants in the cryptocurrency markets, there is significantly less liquidity. This means that there are fewer orders and trading volume is low. Therefore, buying and selling cryptocurrencies will result in huge price changes. This is referred to as slippage.

Although these factors do make it riskier to trade the cryptocurrency markets, they can also provide more profitable opportunities. Many traders are able to profit from a lack of liquidity via an arbitrage strategy. In this case, this means taking advantage of price discrepancies between various cryptocurrency exchanges.

There are many different types of strategies you could implement in day trading cryptocurrencies. If arbitrage between exchanges does not suit your preferences and goals, you can also use technical indicators built into your trading platform’s charts. Also, you can use candlestick strategies and look for various key patterns in the price charts. The bottom line is there are many ways to make real money day trading cryptocurrencies.


How to Set Up a Crypto Day Trading Plan?

You should be sure to do thorough research before choosing to day trade cryptocurrencies. Some markets are more liquid than others while some may have more volatility. Also, the fundamental factors, such as the future supply of tokens, new developments in a blockchain or other unique qualities could factor into your decision as to which cryptocurrency market is best for your trading goals and risk profile.

Along with choosing which cryptocurrency to trade, you should also consider which cryptocurrency exchange or broker you would like to trade with. You will even want to choose multiple cryptocurrency exchanges if you are looking to implement an arbitrage day trading strategy. Take a look at the differences in transaction fees for each exchange and also take into consideration the design of the platforms and the trading features included.

Another aspect you should consider is when you will day trade cryptocurrencies. Usually, you will want to choose a time with the most liquidity, since you will be able to receive better price fills which can enhance profit margins. However, this may not be the case if you are looking to perform arbitrage trades between exchanges. In this instance, you may prefer the opportunities provided in the price discrepancies between exchanges caused by slippage. In any case, you will want to be aware of the volatility level at different times of the day and choose the time period which best fits your needs.

Also, to be a successful day trader you do not have to execute trades every day. You should only trade when the market conditions are right for your trading strategy and preferences. Most day traders tend to avoid the weekends because there is less movement in the markets during that time, which means fewer opportunities.

Below are the details one highly profitable trading strategy that is used by many expert day traders:

Step 1: Choose coins with high liquidity and volatility

For this trading strategy, you will need a decent amount of liquidity in the market to implement the strategy successfully. Usually, the most liquid cryptocurrency market is Bitcoin. However, if you prefer to trade other cryptocurrencies, you should make sure you choose a coin that usually has deep liquidity and sufficient volatility. Currently, there are more than 5,000 coins in the cryptocurrency markets to choose from.

Step 2: Use the Money Flow Index Indicator with a 5-Minute Chart

The Money Flow Index (MFI) is a technical indicator which tracks when institutional market participants are buying and selling assets in the cryptocurrency markets. Set the MFI indicator settings to 3 periods. Then, change the default levels for buying and selling from 20 to 0 and respectively from 80 to 100. These settings will allow you to use this powerful indicator for this particular strategy to make consistent profits.

Step 3: Wait for the MFI to hit the 100 level

When the MFI reaches the 100 level, this will indicate the large financial institutions are starting to make trades. When buying, because of the sheer size of the transactions, the large institutions are not able to hide their activity because of the large impact their actions have on the markets. The signs of large institutional trading activity can be read with the MFI indicator.

On the other hand, technical indicators are not perfect and can be inaccurate at times. Therefore, it is essential to have additional required parameters to execute a trade. Skip the first two 100 level MFI readings and analyze the price chart. You will be looking to see if the price level is maintained during the first two 100 level readings on the MFI for the current trading day. If the market price drops following the first two 100 level readings, the market will likely experience a down day.

Step 4: Buy if 100 level is hit and there is a subsequent bullish candle

Once you skip the first two MFI readings, you will wait for the next MFI reading to hit the 100 level. However, before you execute a trade on that reading, you have to make sure that the next candle is a bullish candle. This means that the close of the candle will have to be close to the upper end, which creates a candle with a small wick.

You should also know that you do not necessarily have to wait for the third MFI 100 level reading. Of course, if the third MFI reading is not followed by a bullish candle then you should not take the trade. You can also alter the trading strategy to skip only the first MFI reading if you are time constrained. However, it is necessary that all of the other technical requirements are met before executing the trade.

Step 5: Place Stop Loss underneath the daily low. Take Profit within the first 60 minutes following trade execution.

An integral part of a trading strategy is to minimize the risk of loss. Therefore, place a stop loss just below the lowest price reached during the current trading day. If the market price breaks below this level, it will signal a change in market sentiment which means it would be best to exit the trade to avoid further losses. This may also be a sign of a day in which the market reverses direction.

The rules for exiting with this trading strategy are somewhat flexible. However, as long as you take profit within the subsequent 60 minutes after entering the trade you will still be following the trade strategy’s rules. Remaining in the trade for longer than 60 minutes will usually correlate with a lower rate of success, according to backtesting results.

Exit Strategy

Regardless of which strategy you use to trade, having set rules to exit a trade is designed to keep you from emotional trading. It will prevent you from exiting a trade too early due to fear of loss. This will many times result in missing out on a trade that eventually becomes profitable. Also, an exit strategy will make sure you do not hold onto a trade for too long due to being greedy, which can end up turning a once profitable trade into a loss. Also, having a Stop Loss in place will protect you from volatility which could be caused by unexpected market news or other factors.

Crypto Market Trading Mentality

Generally speaking, there are three aspects which make a good trader: fundamental analysis, technical analysis, and trading psychology. Usually, the first two items are the easiest to learn, but the final part, trading psychology, is the most challenging to master. Controlling your emotions is key to making smart trading decisions. The only way to do this really is by creating a rule-based trading plan and strictly following the rules.

Also, backtesting your trading strategy will give you confidence that the strategy will be profitable in the long-term and that just a couple losing trades does not mean you should abandon the trading plan. Additionally, more trading experience allows you to deal with your losses without overreacting or becoming overly emotional. Avoiding emotional trading is one of the reasons that automated trading software is used by investors.


Pros and Cons of Day Trading

The following are the various advantages to day trading:

  • Variety of trading strategies – Trend following, counter-trend trading, breakout trading, technical indicators, candlesticks, chart patterns and more.
  • Numerous opportunities – Since day trading is usually done on shorter time frames, there will be many potential trade setups throughout the day.
  • Measuring performance – In day trading, you will be opening and closing trades multiple times per day, which means you will have measurable results quickly, allowing you to make adjustments if needed.
  • Technical setups – Technical analysis is more relevant, providing you with numerous opportunities.

Below are some of the disadvantages of day trading:

  • Trading costs – More trades mean more costs of execution.
  • Limited profits – Closing trades after a short period of time means missing out on profitable market fluctuations
  • Market noise – Erratic price movements can result in loss.
  • Over-leveraging – Short-term traders tend to use more leverage which could mean more risk.

Final Thoughts

Now that you are aware of all of the advantages and disadvantages of day trading, you will have to decide if this style of cryptocurrency trading is best for you. This will largely depend on what you are trying to accomplish through trading and investing in the markets. Those who are looking to make money as fast as possible may prefer day trading more than those aiming to invest for retirement. Also, if you are not comfortable with a lot of risk, day trading may not be right for you. But if you are tolerant of significant risk then day trading can reap huge rewards.

However, regardless of if you decide to be a day trader or a more long-term investor, it is still essential to have a trading plan. Even long-term investors, just like day traders, can fall prey to emotional trading. Therefore, a rules-based strategy is always advisable no matter how much prior experience or knowledge you may have in the financial trading markets.


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