Exploring crypto day trading: strategies, tips, and best practices
That’s why traders study crypto day trading strategies – short-term approaches designed to capture intraday moves by entering and exiting positions within the same day. This guide explains how these strategies work, explores popular techniques, and highlights best practices for managing risk in one of the world’s most volatile markets.
What is crypto day trading?
Day trading, whether in crypto, shares or forex, involves buying and selling your chosen assets within the same trading day with the goal of earning from small price fluctuations. The main aim is to capture short-term volatility by entering and exiting numerous positions throughout the day. No position is held overnight in this crypto day trading strategy.
Day traders typically use technical analysis, charting tools and real-time market data to identify entry and exit points. Speed, precision and disciplined order execution are crucial here, as opportunities can emerge and vanish in a matter of minutes or seconds.
Day trading vs other strategies
Day trading differs from a swing trading strategy in that the latter involves holding positions open for several days or weeks. Swing traders look for trends and reversals over a medium-term horizon, using daily or weekly charts. You don't need to monitor the markets constantly in swing trading, but you still need to actively manage your positions.
A scalping trading strategy is an ultra-short-term approach that attempts to profit from the smallest price changes. Positions are held for a few seconds to a few minutes here, while day traders can hold positions up to a few hours. Scalping is essentially high-volume trading and is best suited for highly liquid assets with tight spreads.
A trading strategy unique to cryptocurrencies is HODLing, an acronym for Hold On for Dear Life. This is a long-term strategy, where you buy cryptos and hold on to them for months or years. Short-term volatility does not affect you since the aim is to capture the long-term growth potential of the digital currency.
Market structure for crypto day trading
The cryptocurrency market’s structure is particularly suited for day trading due to its volatility and liquidity. Cryptocurrencies are known for their dramatic price swings. This high volatility creates abundant opportunities for day traders. When you choose to trade cryptos with contracts for difference (CFDs), you can speculate on both upward and downward price moves, without owning the underlying asset.
Day trading relies on reliable liquidity, which means how easily you can buy or sell the asset without meaningfully affecting its price. Highly liquid coins help traders enter and exit positions quickly at their desired prices, minimising slippage. Low-liquidity coins can lead to wider bid-ask spreads and difficulty in executing large orders. Due to its higher liquidity, bitcoin is popular for day trading strategies.
Want to learn more about CFD trading? Check out this guide on how CFD trading works.
How to start day trading cryptocurrency
To begin your day trading journey, you need to choose a trusted exchange and pick the coins you want to trade. Here are some tips for making these choices.
Choosing the exchange
Prioritise exchanges with strong security measures, such as two-factor authentication, cold storage options and insurance. Compare the trading fees. Lower fees can improve profitability, especially with high-volume trading. However, low fees should not be the sole criterion in your choice.
Look for exchanges that not only list your chosen coins but also have high trading volumes for your preferred coins to ensure good liquidity. Check for responsive customer support. It can be invaluable when issues arise.
Picking the right coins
Not all cryptocurrencies are suitable for day trading. Focus on coins that have high liquidity so that you are sure of quick entries and exits. Volatility is another important factor. While it brings risk, it also creates the price moves needed for day trading.
Plus, high trading volume often correlates with better liquidity and indicates strong market interest. This can make price moves more predictable and less susceptible to manipulation.
Generally, large-cap cryptocurrencies like bitcoin (BTC) and ether (ETH) offer the best combination of liquidity and volatility for day trading.
Potential crypto day trading strategies
Once you've chosen your preferred coin and exchange, the next step is to choose the type of crypto day trading strategy best suited to your trading goals and psyche.
Scalping
As mentioned earlier, scalping is a very short-term strategy where you need to enter and exit positions within seconds or minutes. It requires intense focus, rapid execution and a deep understanding of how the market works for your chosen coin. Scalpers typically use leverage to amplify small gains and rely on high trading volume. However, remember that risk management is crucial while using leverage since trading on margin magnifies potential losses too.
Momentum trading
In this strategy, you need to identify strong upward or downward price moves and ride the momentum until it shows signs of weakening. Traders look for breakouts from consolidation patterns or large volume spikes accompanying price moves. The key is to enter early in a trend and exit before it reverses.
Range trading
Range trading is effective when a cryptocurrency's price is fluctuating between clear support and resistance levels, forming a ‘range.’ Traders buy near the support level and sell near the resistance level, repeating the process as long as the price remains within that range. This crypto day trading strategy relies on the assumption that the price will continue to bounce between support and resistance.
Fibonacci trading
Fibonacci retracement levels are used to identify potential support and resistance levels during a trend. The most popularly used retracement levels are 0.236, 0.382, 0.5, 0.618 and 0.786. Traders use these levels to predict where the price might retrace before continuing on its original trend. This is because asset prices tend to test support levels during an uptrend and resistance during a downtrend temporarily before returning to the original trend.
Using trading bots and automation
Given the 24/7 nature and high speed of the crypto market, day trading bots have become popular. These automated programmes execute your trades based on pre-defined parameters and strategies. Day trading bots remove the influence of emotions on trading decisions and allow you to capture opportunities without needing to constantly monitor the markets yourself. These bots can be programmed for simple and complex strategies. However, they require careful configuration, monitoring and an understanding of their underlying algorithms.
Get a deeper understanding of different trading strategies to make an informed choice.
Technical indicators for crypto day trading
Technical analysis is an important part of decision-making for any crypto day trading strategy. For this, the popular indicators are:
Relative strength index (RSI)
The RSI is a momentum indicator that measures the speed and amount of change in the price. It ranges from 0 to 100, where an RSI above 70 is considered to signal overbought conditions while an RSI below 30 signals an oversold market. Day traders use RSI to identify potential reversals or confirm trend strength.
Moving average convergence divergence (MACD)
The MACD is a trend-following momentum indicator that shows the relationship between 2 moving averages of a cryptocurrency’s price. It consists of the MACD line, the signal line and a histogram. Crossovers between the MACD line and the signal line or divergence between the MACD and price can signal potential buy or sell opportunities.
Moving averages (MAs)
MAs smooth out price data over a specific period, helping to identify trends by smoothing out short-term price fluctuations. Common MAs include the simple moving average (SMA) and exponential moving average (EMA). Day traders use MAs to identify trends, understand market momentum and determine potential support and resistance levels.
Bollinger bands
Bollinger bands consist of three bands – a simple moving average (the middle band) and 2 standard deviation bands above and below it. They measure market volatility and identify overbought or oversold conditions. When the bands narrow, it is taken as a signal of low volatility and vice versa. Prices touching or breaking outside the bands can indicate a continuation or reversal of the trend.
On-balance volume (OBV)
Volume is the total number of units of a cryptocurrency traded over a specific period. High volume confirms the reliability of price moves, while low volume can indicate a lack of conviction. So, OBV is a momentum indicator based on the idea that significant price moves are often accompanied by a surge in trading volume. Rising OBV suggests buying pressure and potential price increases, while falling OBV signals selling pressure and potential price decreases.
How to combine indicators into a strategy
No single indicator provides a complete picture. Experienced traders use 2 or more indicators to confirm signals. For example, a trader might look for a bullish MACD crossover combined with an RSI moving up from oversold territory and increasing volume to confirm a buy signal. The goal is to use indicators to validate each other and reduce false signals.
How social sentiment influences crypto price
News, social media chatter (especially from influential figures) and online discussion forums can rapidly shift market sentiment, leading to price pumps or dumps. This is why it is useful to include sentiment analysis in your crypto day trading strategy.
For this, you can monitor social media platforms by following trusted key crypto influencers, news outlets and community forums. You can also use sentiment analysis tools that aggregate social data to provide sentiment scores.
However, remember that sentiment can only be complementary to technical and fundamental analysis.
Learn more about trading cryptocurrencies to refine your strategy.
Managing risks
Risk management is a critical aspect of day trading, given that both the high volatility of the crypto markets and trading on leverage increase risks. Setting stop-loss and take-profit levels at the time of placing an order is an effective risk management technique. Stop loss closes a position when the price of the crypto falls to a pre-decided level. This limits losses when the market moves unfavourably. Take profit orders also close positions, but when the asset price rises to a pre-decided level. This locks in profits before the trend reverses.*
Position sizing is another important technique. Experienced traders follow the 1% rule, where they do not risk more than 1% of their total trading capital on any single trade.
Since day trading focuses on short-term movements, it is useful to mitigate risks through diversification. You can diversify across cryptos as well as across other asset classes. However, avoid over-diversification, as it can dilute your focus and make monitoring positions difficult.
Using leverage wisely is also important. You don't need to choose the highest leverage ratio offered by your broker. Keep your risk tolerance in mind while making a choice, since leverage magnifies both potential profits and potential losses.
Keep the risk-to-reward ratio in mind while placing orders. This ratio compares the potential for profit of a trade to its potential for loss. A popular target is a risk-to-reward ratio of 1:2 or 1:3, meaning for every one unit of risk, you aim for two or three units of profit. For example, if you buy bitcoin at $30,000, you could set a stop-loss at $29,900 (risk of $100) and a take-profit at $30,300 (potential profit of $300). Here, your risk-to-reward ratio is 100:300 or 1:3.
*Standard stop-loss orders are not guaranteed. Guaranteed stop-loss orders incur a fee if activated.
Open a demo account to practice risk management and strengthen your strategy.
Pros and cons of day trading crypto
Before you invest your hard-earned money, you should know the benefits and limitations of trading cryptos. The points in favour of day trading include the high volatility that leads to multiple trading opportunities, the 24/7 nature of the market, and the ability to trade both rising and falling prices via CFDs.
However, like any other asset, cryptocurrency trading has a few limitations. For instance, the fast pace and financial risk can lead to high stress levels and impulsive, irrational decisions. Also, high volatility and leverage can lead to rapid and substantial capital loss, unless managed effectively. Mastering the crypto day trading strategy requires extensive knowledge, practice and discipline.
Start your learning journey by reading about trading essentials.
Legal and tax considerations
The legal and tax landscape for cryptocurrencies varies across countries. Day trading profits might be subject to capital gains tax in some regions. Also, some countries might classify frequent trading as a business, leading to different tax obligations. It is crucial to understand the tax liabilities in your country before trading. You can consult a tax or legal professional for this.
Common mistakes to avoid
Even experienced traders fall prey to common pitfalls. Being aware of them can help you avoid costly errors.
A common mistake is overtrading or trading too frequently. Sometimes, you might trade out of boredom or a desire to ‘make up’ for losses. This can lead to poor decision-making. Entering trades impulsively without a trading plan can be a recipe for disaster. Always ensure predefined entry, exit, stop-loss and profit targets.
Ignoring news and market sentiment is another mistake. This can lead you to get caught off guard by sudden price moves. Also, as mentioned earlier, no single indicator gives the complete picture. Use 2 or more indicators because over-reliance on 1 indicator can lead to false signals.
Even experienced traders sometimes give in to revenge trading, where they try to recover losses by immediately entering another trade, often with larger position sizes and less discipline. This emotional response almost always leads to further losses.
How to build a crypto day trading plan
A well-defined trading plan is your roadmap to capturing opportunities and managing risks effectively. Here are some things to keep in mind.
Follow entry/exit rules
Clearly define the specific conditions under which you will enter a long or short position and when you will exit. These rules should be based on your chosen crypto day trading strategy and technical indicators.
Be disciplined with capital allocation
Determine how much capital you are willing to risk on day trading and how you will size your positions for each trade based on your risk tolerance. As mentioned earlier, the 1% rule is a popular choice.
Keep a trading journal
Maintain a record of every trade, including entry and exit prices, date and time, coin traded, reason for entry/exit (based on your strategy), profit/loss and emotions felt during the trade. By reviewing your performance, you can identify patterns and learn from mistakes.
Evaluate your strategy and make adjustments
Regularly review your trading journal and assess the effectiveness of your crypto day trading strategy. Are certain strategies working better than others? Are your risk-to-reward ratios favourable? Be prepared to adapt and adjust your plan based on market conditions and your performance data.
The crypto market is constantly evolving, and your strategy should too.
Mastering crypto day trading is a journey that demands continuous learning, discipline and emotional control. By understanding the market, employing sound strategies, managing risk effectively and learning from your experiences, you can increase your chances of success in this financial market.
Ready to begin your crypto day trading journey? Open a live trading account.
