How To Go About Day Trading Cryptocurrency

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How To Go About Day Trading Cryptocurrency

Although cryptocurrencies were first invented by Nakamoto as a way to facilitate payments and get rid of financial intermediaries, they quickly evolved into trading assets due to their high volatility. As a result, asset and forex traders from traditional markets began trading crypto, as a way to turn a profit. While there are many ways to make money with Bitcoin and other coins, day trading cryptocurrency is one of the more popular options.

What is Day Trading?

Day trading is probably the most basic trading process in existence, whose core principle may be summed up as buying low, selling high. This type of trading is short-term, where you trade within a couple of hours or days. Successful day trading involves traders getting into the market, taking a position, and continuing to monitor this position until they exit, ideally with a profit.

Anybody and everybody can become a day trader, however, turning it into a profession involves a lot of research, including a good understanding of cryptocurrencies and reading crypto charts. It is not uncommon that professional traders operate a faster turnaround, with purchases and sales occurring in a matter of minutes, or even quicker if using bots.

Starting Crypto Day Trading

The very first thing you need before you can start day trading cryptocurrency is a reliable and convenient exchange platform. Whilst there are literally thousands of exchanges, there is just a handful which offer the right balance of flexibility, functionality and affordability. You should start by opening an account with:

Coinbase Pro

The Coinbase brand is a well-known global exchange which is based in the US. Regulated and licensed, Coinbase Pro provides analysis tools and charts for a good number of cryptocurrencies. Featuring significantly lower costs than Coinbase broker, the Pro version features high liquidity, an intuitive interface, and an in-built wallet where to store your coins in between trades. 

Coinbase Pro is an extremely safe trading platform and offers enhanced security access which includes 2FA. It is an ideal exchange for beginner traders, especially ones who have experience using Coinbase or are looking to invest in cryptocurrency using fiat currency.

Coinbase Pro’s fees usually range between $0.99 and $2.99.

Binance

Binance is a popular exchange for day trading cryptocurrency since it offers an almost exhaustive list of coins and tokens. In fact, one of the world’s largest exchanges supports more than 100 trading pairs. This makes it the best exchange for Altcoins. The exchange is designed especially for high-frequency traders, offering a range of analysis tools and historical data.

Whilst Binance has introduced the option to buy cryptocurrencies using fiat currency, this is quite expensive. It is normally cheaper to buy Bitcoin or Ethereum from another exchange and then transfer it to Binance.

Binance’s fees average 0.1% Maker and 0.1% Taker, although discounts are available to high frequency or volume traders. Moreover, using BNB, Binance’s native coin, traders get access to additional discounts.

Kraken

Kraken is a highly secured cryptocurrency exchange which is best for advanced traders. Regulated in the US, UK, and Canada, Kraken supports both fiat-to-crypto and crypto-to-crypto exchanges. It provides users with a sleek interface, competitive fees and a good selection of cryptocurrency pairs.

The exchange is highly liquid and features the results of proof of reserves audits carried out throughout the year. It’s also available on mobile and offers automatic stop limits with each order.

Kraken’s fees average 0.2% Maker and Taker, although significant discounts can be obtained for 30-day volumes which exceed $50,000.

Due to the nature of day trades, consisting of constant buying and selling, fees are an important element when considering which exchange to open an account with. This is especially true if you will be trading large volumes whilst making small profits on each trade.

Once you get set up with one exchange you should consider opening one or two more. Doing this will allow you the option of arbitrage, or, at least, the ability to compare different prices for the same cryptocurrency.

Your Day Trade Strategy

Day trading cryptocurrency is considered a high-risk investment, so before you jump right in you should work on developing your own strategy. In time you would have gained sufficient experience to know what works and what doesn’t, but here are a few tips to help get you started.

  1. As a rule of thumb, you should never put more than 1% of your day trading budget on a single trade. This cautious approach may lose you some big profits on occasion, but generally, it should help you maintain and grow your budget.
  2. If you have had a bad run, potentially losing all the money of a trade, do not over-trade to try and recover your losses. As long as you stuck to the first tip, losing 1% of your budget is not the end of the world, just stop trading for the day, tomorrow will bring fresh opportunities.
  3. Especially when starting out, your focus should be on frequent and small profits. Don’t aim to make massive gains on a single trade. Once you have built some good experience and results you can allocate a very small percentage of your larger budget to put towards the riskier trades which have a higher potential.
  4. Setting stop-loss limits will automatically close your position if the coin’s value falls below a certain value. This automatic feature is offered by a number of exchanges, but you could also simply sell your asset manually if the value drops below the limit you have set. Initially, it is recommended to set this limit to 70% of the coin’s purchase price.
  5. You should also decide on the sell limit, which is the highest price the coin’s value should get to before you sell. Again, many exchanges offer an automatic feature for this, but you can also carry it out manually. To begin with, it is recommended that you sell once the coin’s value increased by 30% of its purchase value.
  6. Don’t let emotions or greed cloud your judgement. Once you set your low and high limit stick to them no matter what.

Following these tips would give you a solid foundation before delving into what is realistically considered to be a calculated risk.

A Practical Example of Day Trading Cryptocurrency

If you’re relatively new to day trading cryptocurrency or just need a refresher, consider the following example of a crypto trade.

TimeAction
00:00Buy 500 Cardano (ADA) at $0.9605 each
00:30Price of ADA increases
00:45Price of ADA now $0.9989
00:46Close position, selling all 500 ADA

In this example, the trader bought 500 Cardano coins, believing that the market would grow and allow him to make a profit. He was proved right, and just 46 minutes after the position was open the trader closed it making a gross profit of 4%. In monetary value, this profit would be worth around $19.20. Of course, this is just an example and there is no guarantee that a trade will be successful.

Common Day Trading Mistakes

When you’re day trading cryptocurrency you need to be cautious about making common mistakes. These include:

  • FOMO – Fear of Missing Out (FOMO), along with Fear, Uncertainty, and Doubt (FUD) can cause you to take the wrong decision by letting your emotions take over. Replace FOMO with education, research, and analysis and you’ll reduce the likelihood of placing trades you’ll regret.
  • Wallets – The best way to secure your cryptocurrency is by storing it in hardware wallets. However, these can delay transfers and be inconvenient when you’re trading frequently. Day trading cryptocurrency is best done using hot wallets, such as Coinbase Wallet or eToro Wallet.
  • Liquidity – Smaller exchanges may not be as liquid as you’d like and this means that although you would be able to open a position when you’d like, you may not be able to close it as soon as you wish. Bigger exchanges tend to have higher liquidity, providing the necessary resources for you to open and close trades instantly.

Speculation

Whilst there are many strategies for day trading cryptocurrency, speculation remains a popular choice for many traders. This strategy does not have any defined instructions and lets investors open and close positions based on their gut feeling. Experienced traders use speculation based on new stories, social communications and analysts’ opinions, amongst other sources of information.

Chart Analysis

A more defined approach to day trading cryptocurrency is using charts to try and predict the direction of the market. There are different ways that charts can help you, and you can use historical and live data to analyse the overall direction of the coin’s price. When using chart analysis you should be aware of divergence, which means that a current price trend may be changing. You will be able to find a variety of software applications to help you carry out chart analysis effectively.

Crypto Day Trading Bots

Trading bots have been around for some time, and are theoretically great at carrying out trades without uncertainty and emotions. Basing themselves on several trading algorithms, these bots have long been used by institutional investors and professional traders, and are today available to anyone.

There are many different types of crypto trading bots, and some are also completely free. However, you should consider that most of these bots are not based on Artifical Intelligence, but simply operate based on their programming. Therefore, their performance varies considerably, and completely free ones are certainly not recommended.

Crypto Day Trading and Taxes

While certainly nobody’s favourite topic, you need to consider tax calculation when planning your crypto day trade strategy. Tax laws on cryptocurrency vary considerably from country to country, but they are generally categorised as short-term capital gains.

Tax Rules: UK vs US

Generally, day trading cryptocurrency in the UK would be considered to be a personal trade. This means that any profits resulting from trades would be taxed simply as capital gains. However, trading cryptocurrencies at high frequencies and volumes could be classified as financial trades and taxed under the business income tax regime first.

The same general rules exist across the US, although different states offer different guidelines. Unlike in the UK, there doesn’t appear to be an alternative to capital gains tax, such as you would expect for institutional investors.

If you plan to start day trading cryptocurrency in either of these countries and you believe that you will be moving a significant amount of funds you should speak to a professional about filing the proper tax returns.

Is Crypto Day Trading a Good Idea?

While day trading cryptocurrency has proven to be a successful strategy for many traders, it carries with it risks, just as trading crypto CFDs and other similar investments would. Therefore, before you get started you should consider what budget you could afford to focus on this high-risk investment. The probability is that you will lose money in your initial trades, but if you are able to learn from your mistakes and do proper research, crypto day trading could provide you with a profitable return.

Advantages of Day Trading Cryptocurrency

There are several advantages to day trading cryptos over alternative trading strategies. These include:

  • Low Regulation – Access to a relatively unregulated market where the rules haven’t really been written yet. Whilst this carries some risk, it also provides virtually unlimited possibilities without the inconvenience of traditional trading’s red tape.
  • Volatile Market – The opportunity to experience one of the most highly volatile markets in the world. Crypto’s price fluctuations are oftentimes significant and extremely attractive for high-frequency trades.
  • Always Open – In a world where services are available 24/7, traditional markets have yet to adapt. Cryptocurrencies are the exception, available to trade all day, every day.
  • Less Competition – Getting the edge when trading on traditional markets is extremely difficult considering the high volume of institutional investors. Cryptocurrencies are relatively untouched by such major investors and are an ideal training ground for beginners.

Disadvantages of Day Trading Cryptocurrency

Before you start trading Bitcoin and Altcoins you should be aware of the following disadvantages:

  • No Authority – Operating in a generally unregulated environment, cryptocurrency exchange platforms are autonomous in their operations. This means that if you have a negative experience or a problem it is very difficult to get assistance from an authority. For this reason, you should only use reliable and reputable exchanges.
  • No Control – Traditional markets are supervised and controlled, particularly during instances of high volatility following a major event (such as a terrorist attack). Cryptocurrency markets are not controlled, so anything, even a celebrity tweet, can send traders into a frenzy. You can mitigate part of the risk such instances could bring by setting automatic limits to each trade.
  • No End – The 24/7 operations of cryptocurrency exchanges means that there is no time off if you’ve got open positions. Automatic limits can help you alleviate some of the supervision, although these limits can fail, especially during times of extremely high volatility.
  • No Licensing – Most cryptocurrency exchanges are not licensed and this means that you have no guarantee that the people behind the platform are sufficiently knowledgeable, experienced, and qualified. The best way to mitigate this disadvantage is to choose reliable exchanges which have been in operation for a good number of years.

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