It is not uncommon to hear stories of people who have made lots of money by day trading cryptocurrencies.
It is not uncommon to hear stories of people who have lost lots of money by day trading cryptocurrencies.
Overall, it is a kind of zero-sum game. Some win, some lose, to every buyer there is a seller, every dollar made is a dollar lost.
But just what do we mean for day trading of cryptocurrencies? As the name implies, in this type of trading activity cycles are short. You buy an asset and sell it back within hours, making a profit on the short-term appreciation of the asset’s value.
A common strategy is called Scalping. In this strategy you make many small trades to capture tiny price movements. Normally the profit to be made in a short span of time is not that big. That’s why you must consider carefully the impact of trading and network fees, it can be quite difficult to break even on this strategy. Also, there is a limit to how big your trades can be, as different platforms may have liquidity restrains that can alter the trading price when you place your transactions.
Another strategy is called Momentum trading. This is like surfing on top of a wave, buy an asset that is starting on a bullish trend and ride the price movement all the way to the top. The key is to recognize and liquidate your position before the trend is reversed and your unrealized profit disappears. In this strategy you commit your resources to the trade for a bit longer, so the potential profit of each transaction must be larger.
Unfortunately, it is very difficult to spot the exact moment a trend will reverse. You may find yourself buying in just as the price is about to fall, and then having to hold on for a reversal that may or may not come.
You can also stay tuned with crypto and general economic news to take advantage of the impact of these events on an asset’s price, this is the News-driven trading strategy. The main problem with this strategy is that it can be hard to anticipate the effect of an event on the price of an asset. Some news may have already been expected, and when they happen the asset’s price does not react.
A more complex strategy is called Arbitrage, it means taking advantage of price differences between exchanges. The concept is that you buy an asset on an exchange and sell it at another where it trades at a higher price.
In the end, I must say I have tried all four of these strategies at one time or another. If you are day-trading you are probably following some strategy also. In the end what makes or breaks a successful day-trader is DISCIPLINE.
You must plan very carefully your entry and exit points for each transaction. People normally get greedy when they get a large unrealized gain on a transaction and try to stick in a little longer than their original plan. At that point they start improvising and because margins are small in this type of trading, they can easily erase all the gains in a downturn.
I hope this article is useful to you, just a reminder that these are just my observations after many years in the crypto space. This is not financial advice; you must do your own research into any activity you intend to pursue.
