Day trading cryptocurrency is one of the most exciting investment opportunities out there today. But how exactly do you go about day trading crypto?

How to Day Trade Cryptocurrency

  • Analyze Cryptocurrency Market Trends
  • Decide on a Trading Strategy
  • Pick an Exchange

Cryptocurrency is a digital form of payment from person to person, without the aid of a central bank or issuing government. It’s international, it’s anonymous, and it’s secured by blockchain—a decentralized electronic ledger of all transactions. Cryptocurrency is supposed to be a medium of exchange, just like dollars, pounds, or euros. However, cryptocurrency is also widely traded as a commodity. As it’s not tied to any bank or government, its value only reflects the market in which it’s used. This means its values can go wildly up and down, making it an attractive asset type for investors—particularly day traders.

Can You Make Money Day Trading Crypto?

Crypto aside, day trading is an activity that requires a special set of skills in order to yield a financial profit, whether a day trader is trading crypto, playing the stock market, or buying and selling commodities. The truth of the matter is that most day traders do not make money, and those that do see percentage gains that are roughly equivalent to what they would have seen if they just invested their money in a simple, straightforward set of stocks, like dividend paying consumer staples.

In fact, if you read the best investing books for beginners, you will see that many financial gurus tell their readers to eschew day trading and focus on long term wealth building by consistently contributing to a managed retirement fund, or one that follows a standard index of Blue Chip stocks.

How to Day Trade Cryptocurrency

If day trading cryptocurrency is still calling your name, you can start trading it by following these steps:

Analyze Cryptocurrency Market Trends

A successful crypto trader will use experience and knowledge to analyze the numbers. Chart patterns, volume, price, and other technical indicators are just a few factors they synthesize into their choices for buying and selling crypto. Of course, the goal is always to buy low and sell high, but crypto is particularly volatile, so making a profit from day trading crypto will require even more technical analysis than other securities, such as stocks issued by companies on which fundamental analysis can be performed.

Remember that cryptocurrencies are actually forms of currency whose value is entirely defined by the market, unlike a company that has intrinsic worth or future promise based on their products or board of directors. Still, the crypto market has created trends that can be analyzed for the purposes of day trading Bitcoin or any other crypto. Sometimes new cryptos are launched, and potential investors in the know will have the opportunity to join in at the ground level.

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Decide on a Trading Strategy

There are several choices to select from in terms of a crypto day trading strategy, each with its own trading psychology and skill level demands. The day trading strategy a crypto trader uses will depend on whether they fall into the category of beginner traders or advanced traders, how much access to capital they have, and other factors, such as risk tolerance.

Scalping

Scalping involves taking advantage of small price moves during short term timeframes. These may be price moves in actual liquidity (that is, the price of a given crypto) or derivatives that relate to price movements, such as the bid ask spread.

Because scalpers are capitalizing on smaller price movements, they tend to place trades that are larger in volume, which sometimes means they will trade on margin. Margin trading essentially means trading with borrowed funds. In addition to heat maps and technical indicators, scalpers may use an order book to place trades, which is a list of open buy and sell orders for a crypto currency at its various prices—indicating buyer interest and assisting a trader in predicting price movements.

Range Trading

Range trading primarily relies on candlestick chart analysis to look for typical price ranges that indicate safe places to enter and exit a position. That is, a price range where the investor can buy a crypto at a certain price (which typically indicates the bottom of range), and sell when it hits the part of the range that indicates the price will fall. The endpoints of the range are referred to as support and resistance levels, and they guide traders on when to buy or sell a crypto.

Range trading carries a little more flexibility than scalping. It is better suited for crypto day trading beginners. While both scalping and range trading are types of swing trading—that is, day trading that relies on price swings to realize a profit—range trading would seem to be for traders who are more averse to risk, because attempting to capitalize on short term price swings with something as volatile as crypto can yield serious losses in the blink of an eye.

The slower pace of range trading also does not necessarily attempt to capitalize on a larger amount of quick price movements, allows crypto traders to move at a lower trading volume, which may mean they can trade with their own funds instead of engaging in margin trading.

High Frequency Trading

High frequency trading will require creating a computer program that uses algorithms to analyze market data and enter and exit (that is, buy and sell) in millisecond timeframes. Most traders are not interested in selling the crypto trading bot they’ve created because this would destroy their advantage. In fact, if there was a company that developed a crypto trading bot that really worked very well, and they sold it to anyone on the market who wanted to buy it, nobody would be able to see a profit because the strategies leveraged by the bot would not work anymore.

One way around this issue is by putting a prohibitive price tag on the software. Even so, HFT (as high frequency trading is called in shorthand) is a pretty exclusive industry. Typically, in order to profit from this trading strategy, you will have to have the technical competence to build and service a trading bot. There are some programs available to be purchased, but oftentimes they do not live up to their reputation, as the best high frequency traders use their own programs.

Pick an Exchange

Because cryptocurrency is still largely unregulated, there is not one centralized place where they are bought and sold, like the New York Stock Exchange or the Chicago Mercantile Exchange. In fact, there are dozens of different places where you can buy and sell crypto, the most popular among them being Binanse, Huobi, and Coinbase.

If you are leveraging some of the strategies mentioned above and you have the cash to purchase some of the more established and expensive cryptos (like Bitcoin), then one of these marketplaces is your best bet. If you do not have enough money to buy into certain cryptos, then an app like Robinhood will allow you to buy fractional shares of the most popular coins. Keep in mind that a trading app like Robinhood might not charge trading fees, but many platforms do charge some sort of transaction fee, in addition to exchange fees for turning your fiat currency (dollars, pounds, etc.) into crypto.

How is Day Trading Cryptocurrency Different Than Stocks?

The stock market can be volatile, but crypto is even more volatile because it is brand new and completely unregulated. Whether or not crypto will settle down over time remains to be seen.

Stocks also produce dividends, which crypto does not. Dividends are a portion of company profits issued to shareholders. Stocks are shares of ownership in a company, while crypto is just currency, so it doesn’t yield any payable profits other than its own increase in value. In fact, crypto wasn’t even really created to be traded, just used as a medium of exchange. However, because crypto is unregulated and there are multiple exchanges, traders can also profit by purchasing crypto in one exchange and selling it in a different exchange where it’s listed at a higher price. This is another day trading strategy not discussed above, but it can work very well for crypto traders who can capitalize on these types of price differences.

Is Day Trading Cryptocurrency Legal?

Cryptocurrency trading is certainly legal. Moreover, since the crypto market is still highly unregulated, cryptocurrency day trading can be even less restricted than stock market day trading.

A crypto day trader can use their trading platform of choice without worrying about running afoul of the SEC or the limitations placed upon them by a cryptocurrency exchange in accordance with government laws. It should be noted, however, that as major financial institutions such as the Federal Reserve begin to develop their own cryptocurrencies, a cryptocurrency trader might find themselves in a totally new landscape of regulations. Some financial pundits have predicted the advent of federally regulated crypto as potentially the end of the crypto market, citing what happened to unregulated media downloading software, like Napster and Limewire ,once iTunes came around.

Major US banks are also developing their own crypto, and the People’s Bank of China has already rolled out digital Yuan. Only time will tell how government regulated crypto changes the game, but until then, trading Bitcoin or any other cryptocurrency is a lot like the a gold rush.

Do Day Trading Rules Apply to Cryptocurrency?

No, they do not. Stock investors and day traders must adhere to certain rules laid out by the Securities and Exchange Commission (SEC), as well as the executives of a given company filing paperwork when they buy and sell shares of stock in their company. Day traders must maintain a balance of $25,000 or more in their brokerage and meet other criteria in order to file taxes as a day trader.

In general, the stock market has rules to prevent (as much as possible) market manipulation and practices that would erode investor confidence. Crypto is the Wild West in comparison, at least for the time being.

Should I Day Trade Cryptocurrency?

While day trading cryptocurrency can be lucrative to those with the right skills, everyday retail investors are better off not trying to day trade crypto because of the volatility of the market and the amount of technical analysis required to perfect the art of day trading it.

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