Day Trading Cryptocurrency: How To Avoid Getting Rekt

Delton Rhodes
Delton Rhodes
Day Trading Cryptocurrency: How To Avoid Getting Rekt
Table of Contents
Table of Contents

Day trading cryptocurrency can be profitable, but also risky even for experts. Read this guide to understand the market dynamics before getting started.

The advent of online trading platforms has led to the rise of day trading as a profession. If you’ve heard about day trading, it might sound like a dream. But as with any profitable endeavor, there is a lot of skill and experience required. Day trading cryptocurrency can be profitable, but it’s undoubtedly riskier than trading in traditional financial markets.

What Is Day Trading?

Sometimes called intraday trading, day trading is a type of investing strategy where a trader buys assets and sells them within the same day. Crypto day trading is just one example. Traditionally, stock market day trading was quite popular many years before the crypto market reached today’s level of maturity. Cryptocurrency day trading has become an appealing option, especially because, unlike traditional markets, exchanges run 24/7/365 without a market open or market close.

Understanding Crypto Market Characteristics

Before you open a market position, it’s essential to have general background knowledge about some of the things that impact crypto price action - and hence your pursuit of generating revenue as an aspiring crypto day trader.

Volatility

Compared to other financial markets, day trading crypto typically means dealing with significantly more volatility. Finding dips for specific cryptocurrencies is quite easy for this reason. Daily price swings up or down 10%, or even much more, are extremely common. The risk is that the market sometimes keeps on dipping or rising without a clear reason why. Another risk to consider is flash crashes. As one example in March 2021, Polkadot (DOT) perpetual-futures contracts on Binance suddenly crashed by 99.2% after one large order was placed. It’s also possible that the entire crypto market can suddenly crash as it did in March 2020. This makes crypto futures day trading with high leverage particularly risky.

FUD & FOMO

The crypto market is filled with FUD (fear, uncertainty, and doubt) and FOMO (fear of missing out). Like it or not, these tend to play a major role in the market psychology and lead to massive price swings in either direction, even in short intervals that impact day trading crypto. The news cycle has a major impact on market perception. One example is the SEC lawsuit against Ripple. When the news of the lawsuit was first announced in December 2020, the price of XRP went from around $0.60 to $0.30 in less than three full days. In April 2021, the price jumped from around $0.60 to more than $1.00 in less than a week after the court granted Ripple access to information about how Bitcoin and Ethereum are legally considered in the US to build its legal defense. This example shows that while technical analysis is important, trends can easily break away based on unpredictable events - both positive and negative.

Liquidity, High Slippage, and Fees

Depending on the trading pair and exchange you’re trading on, liquidity may vary quite a bit. While the status of an exchange’s liquidity isn’t a big issue if you’re making one-off trades occasionally, it is very important to consider when day trading. The reality is that even some of the exchanges with the deepest liquidity have high slippage at times. Also, trading fees can cut into profits especially when you consider how many trades you need to make a profit.

Polkadot Futures Flash Crash - Binance
In March 2021, Polkadot (DOT) futures experienced a flash crash on Binance caused by a single large trade.

Day Trading Cryptocurrency Strategy

Successful crypto day traders apply strategies and stick to them as much as possible, regardless of what the market is doing. There isn’t a right way or wrong way to approach the crypto market, but there are a few time-tested game plans that may work in your favor.

High-Frequency Trading (HFT)

As the name suggests, high-frequency trading (HFT) involves making a large number of trades in a fraction of a second. Typically, HFT depends upon finding crypto arbitrage opportunities with advanced algorithms. HFT is commonly known as quant trading or quantitative trading. For the average person looking to start cryptocurrency day trading, this is one of the more difficult tactics to apply. Like in other financial markets, crypto HFT is mainly dominated by large firms with ample resources to invest in trading bots that can continuously optimize and better predict market trends.

Scalping

Scalping involves making multiple trades each day and finding opportunities even with the smallest of price movements. Crypto day traders who use this strategy don’t have to make as many trades as the above-mentioned HFT strategy to be successful. Scalping sometimes requires carefully trading on margin to increase the size of wins. With scalping, the idea is to make a buy and sell in a shorter time frame to avoid market risks like flash crashes, which become more probable with having open positions over longer time intervals.

Range Trading

Range trading revolves around technical analysis (TA) of price levels for a specific trading pair. Let’s say you want to look at the BTC/USD trading pair on a particular crypto exchange. You’ll be looking at support and resistance levels of the price chart. The expectation is that the price of the trading pair will remain within a certain range. For example, if the price of BTC is $56,000, you might expect it to go as low as $52,000 or as high as $60,000 within a certain time interval. Based on this information, a day trader will make buy and sell orders at various price points. To prepare for cases where the price breaks outside of the range, day traders will create stop-loss orders to avoid taking massive losses.

range trading
Range trading is a common crypto day trading strategy

Getting Started - Things To Consider

Day trading cryptocurrency is more than just about reacting to price action. It’s about being fully immersed in the crypto market and understanding the unique challenges and opportunities as well as keeping up with the evolving landscape.

Exchange Security

It’s estimated that 80% of cyber theft from the past decade (2011 to 2021) involved cryptocurrencies. From the Mt. Gox hack that lasted all the way from 2011 through 2014 to the DeFi smart contract rugpulls of 2021, cryptocurrency traders have always faced a long history of security challenges. Even for exchanges that have crypto insurance policies, never assume that your assets are safe. For day traders who will likely keep more funds on centralized exchanges compared to the average investor, it’s crucial to choose a trading platform with a good security reputation. Even more importantly, you should always secure your crypto and exercise basic precautions to protect your funds as much as possible. Enabling two-factor authentication (2FA), whitelisting addresses, and steering clear of phishing attempts are a few easy ways to keep your funds more secure.

Using a decentralized exchange that supports non-custodial wallets is also a good alternative to using a centralized exchange. The challenge is that most DEXs today only support Ethereum and ERC-20 trading, which is extremely costly in terms of fees. Thankfully, new types of DEXs such as BEP-20 DEXs and atomic swap DEXs are making it more practical to have both low trading fees as well as greater security for crypto day trading.

Day Trading Cryptocurrency Taxes

Quite possibly the most important factor to take into account when day trading is cryptocurrency taxation. On a global scale, many jurisdictions already have clear guidelines in place on what is or isn’t a taxable event. The cost of day trading cryptocurrency taxes depends upon your citizenship. Oftentimes, it’s better from a tax perspective to HODL crypto rather than make frequent trades as day traders do. Unlike long-term investors, you likely won’t be able to benefit from tax-loss harvesting due to wash sale rules

Free and Paid Signal Groups

There are plenty of free and paid groups out there that focus specifically on crypto signals. You can learn a lot about general best practices for crypto trading by joining a community with a similar focus. YouTube is another platform where you can learn from some of the best day traders on the planet. With that being said, do your own research and choose the educational resources that are best for you. It’s a good idea to check out multiple places for trading strategies. At the end of the day, however, it’s up to you to make your own financial decisions.

Going From Newbie To Professional - It’s Not Easy

There is a common saying that “95% of traders fail.” Actually, no extensive research supports this statement. However, many people say the failure percentage is much higher. Becoming a professional day trader is about skill and discipline. In the bull market of 2017, for instance, almost everyone was making massive profits from trading and seemed like a genius until the major crash happened. To really succeed as a day trader in the bear market of 2018 and 2019, for example, it took a lot more skill. One way to get on the path to success is to never let emotions control your decision-making. Looking at key metrics and making evidence-based trades is crucial. Avoid becoming overleveraged on futures trading because it could lead to massive losses. Going from a beginner to a seasoned vertan takes time. Becoming a professional day trader is a good goal, but it requires a lot of patience, dedication, and perseverance.

Cryptocurrency day trading monitor setup
You don’t need a ton of monitors to get started with cryptocurrency day trading, but this could be helpful if you’re looking to make this your profession.


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