Day Trading In Crypto: Advanced Guide For Investors

Among the various crypto trading strategies, day trading is the most suited for active investors looking for short-term gains. However, before starting to analyze how crypto day trading works, it is worth noting that a common mistake new crypto traders make is trying to generate large profits in a short time frame. Keep in consideration that almost 70% of traders lose money, and only a small percentage can consistently outperform the 10% annual average performance of the main indicator of the stock market, return generated by the S&P 500). 

If you want to make day trading your full-time job, also bear in mind that it requires a variety of skills and knowledge, as well as time availability, emotional control, patience and a decent budget. If you don’t think you’re suited for day trading, and you mainly focus on long-term opportunities and passive management, then you should consider other crypto trading strategies, such as HODLing, Dollar-cost averaging, momentum trading, and more. Now, let’s understand how day trading works so that you can better understand if it’s suited for your trading approach.

Day Trading in Crypto: Main Strategies

At Trakx, both on our platform and in our educational guides, we always recommend implementing a clear strategy and sound risk management practices before starting with crypto trading, so it’s time to analyze the most common day trading strategies together.

Scalping

Scalping is the most popular day trading strategy and implies making a large number of small trades during the day, aiming to capitalize on tiny crypto price movements. Even if the profit from each trade might be quite small, thanks to the cumulative gains, it can increase quickly, especially when you manage to have a good percentage of successful trades.

Scalping traders use technical indicators to conduct technical analysis and identify short-term price movements, opening the trade according to their beliefs and indicators. The trades can last a few minutes or even seconds, and scalpers usually use stop-loss and take-profit orders to automate the opening and closing of the trade. Being a successful scalping trader is not easy, since you need to pay constant attention to the market and have excellent skills in reading charts, technical indicators, and crypto news. Lastly, but very importantly, to be successful in day trading, you must be able to act rationally regardless of the market conditions and not let yourself get carried away by emotion.

Range Trading

Range trading is a day trading strategy that capitalizes on opportunities generated by natural price bounces between support and resistance levels. Range traders typically execute a few trades during the day, aiming to generate a moderate daily profit. Aiming for higher returns is likely not possible since if you perform “only” 0.5% every day, you would multiply your initial capital by 5x in a year, and it’s a semi-impossible mission for all traders.

The first step in range trading is to identify a trading range, which is the price corridor where an asset consistently moves between a high (resistance) and a low (support). Traders use technical analysis to pinpoint these levels by observing historical price data and identifying peaks (resistance) and troughs (support). For example, if Bitcoin has repeatedly bounced between $30,000 and $32,000 over a certain period, this could be considered a trading range. The key for range traders is to buy at or near the support level and sell at or near the resistance level, profiting from the price swings within this range.

High-Frequency Trading

High-Frequency Trading (HFT) implies leveraging algorithms to analyze data at a high-speed rate to execute multiple trades in a fraction of a second, offering the opportunity to capitalize on tiny price swings. HFT is based on automated trading strategies developed by quantitative traders or financial engineers, and its algorithms automatically scan multiple exchanges, track order book data and depth, and execute trades almost instantaneously, aiming to make a profit from quick trades.

The algorithms can analyze different factors and exploit various strategies, such as arbitrage opportunities, market-making services, or momentum trading, accumulating small profits for each trade. However, HFT is not for everyone since you need to deeply understand market dynamics, indicators, technical analysis, and advanced coding skills, necessary to develop a functional and effective crypto trading bot. It’s also very important to test the system before using real funds since even a minor bug or a millisecond delay can lead to missed opportunities or losses. Critics argue that this strategy can significantly influence market prices and potentially disadvantage slower traders, but of course, this strategy is allowed and legal in most jurisdictions.

Technical Analysis for Crypto Trading

All the day trading strategies just explained are based on technical analysis, which involves analyzing price charts, trading volume, and other technical indicators to understand the dynamics of the asset and aim to predict future price movements. Unlike fundamental analysis, which focuses on the intrinsic value of an asset, technical analysis is purely based on market data and trends, and it’s essential for making informed trading decisions.

Key Technical Indicators for Day Trading

Several technical indicators are particularly useful for day trading in the crypto market:

• Moving Averages (MA): Moving averages smooth out price data to identify trends over a specific period. The two most commonly used are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
• Relative Strength Index (RSI): RSI measures the speed and change of price movements to identify overbought or oversold conditions. An RSI above 70 typically indicates that an asset is overbought, suggesting a potential price decline, while an RSI below 30 indicates oversold conditions, suggesting a potential price increase.
• Moving Average Convergence Divergence (MACD): MACD is a trend-following indicator that shows the relationship between two moving averages of a security’s price. It’s used to identify potential buy and sell signals based on the crossover of the MACD line and the signal line.
• Bollinger Bands: These bands are plotted two standard deviations away from a simple moving average and are used to measure market volatility. When the bands widen, it indicates increased volatility, while narrowing bands suggest lower volatility. 

Risk Management in Crypto Trading

Risk management is another essential component of successful day trading and allows traders to limit losses and partially control volatility. Recovering a loss is always more difficult than obtaining a profit (e.g., To recover a 50% loss, you need to generate a return of +100%), and limiting risk is essential since it allows you to preserve capital and maintain long-term profitability. It’s not uncommon to see crypto day traders performing +20% in a day, but how many of them manage to be consistently profitable over the year? A very small minority, since less than 30% of active traders actually manage to be profitable over long periods. So, how do we implement sound risk management practices?

Set stop-loss orders

Stop losses are predetermined price levels at which the trade is automatically closed to limit losses. Day traders use this tool to protect their trade against rapid and drastic price swings, controlling the maximum amount of loss for each trade and decreasing the risks of large losses. It’s common to put stop-losses near support levels (below, for long positions; above, for short positions) to ensure the automatic closing of the trade if the price breaks out from a trading range. Stop-losses are a powerful tool, but you must use them carefully since placing them in the wrong position can cause unnecessary losses and the premature (or late) closing of a trade.

Position sizing

Position sizing is another common technique to implement sound risk management, and it focuses on limiting the amount of capital allocated for each trade. It implies investing only a small part of your total capital in each trade (a common rule is the “1% rule”, in which traders should allocate a maximum of 1% of their total capital on any single trade) and this allows you to limit potential losses and avoid overexposure. Of course, allocating only a small part of your capital to each trade can limit your profit opportunities, but at the same time, it can save you from losing a considerable amount of your capital, and as we discussed earlier, it’s better to not lose money than make a profit since it’s more difficult to recover losses rather than make a profit. Patience is key.

Diversification

The last common risk management technique is based on buying various different assets to smooth out the impact of one poor-performing asset. For example, if you allocate the majority of your capital to a single cryptocurrency, if it drops, your performance will be significantly negatively affected by that price swing. On the contrary, if you invest in various assets, and only one of them performs poorly, it doesn’t affect the overall portfolio performance so much. An excellent example of this is the $LUNA failure: Many investors strongly believed in the project’s potential, and overallocated funds to this asset, which left them “rekt” when it subsequently failed.

Leveraging Trakx for Advanced Crypto Index Trading Strategies

At Trakx, we’re well aware of the risks and complexities of the crypto market, and we developed advanced crypto baskets, called Crypto Tradable Indices, that allow institutional and retail investors to implement advanced crypto trading strategies while prioritizing risk management, ease of use, and automatic rebalancing. How do crypto baskets work?

Crypto Tradable Indices: Customized Crypto Baskets

We’re innovating the crypto investing sector by providing reliable, secure, and effective crypto baskets that allow investors to implement automatic crypto index trading strategies and advanced risk management. Some crypto baskets are more suited for conservative investors since they focus on reducing volatility and inherent risks by dynamically adjusting the exposure to crypto assets based on technical indicators, offering traders the opportunity to capitalize on market movements while ensuring passive management and automatic rebalancing, seizing the momentum opportunities effectively. Some other crypto baskets, such as the AI, the Meme, and the RWA Crypto Index, focus on thematic exposure and are more suited to growth-oriented investors looking to generate alpha and outperform the main market benchmark, such as the Top 10 Crypto Index. By having a wide selection of crypto index funds, we can satisfy different kinds of investors, allowing them to choose the best crypto index for them based on risk tolerance, capital availability, trading strategy, time available, goals, and personal needs. One of the most important features of our Crypto Tradable Indices is their underlying risk management practices that allow traders to implement risk management with ease, focusing on diversification, reduced volatility, and position sizing. If you’re evaluating becoming a full-time day trader, remember to prioritize risk management and DYOR (Do your own research).