How to day trade cryptocurrency: key rules to follow

November 21, 2018
Darya Karatkevich

Day trading is exactly what it sounds like — buying and selling a financial asset and closing all trades within that same trading period. It used to be exclusively the domain of large investment firms who had traders at the exchanges, but as technology brought access and speed to the masses, it made it possible for the average investor to engage in day trading.

The same is true for the cryptocurrency markets. However, the additional volatility in the crypto market means that you can both make and lose a lot of money. Make sure you have the time dedicated to properly research and monitor your trades. Unlike buying and holding an asset, you’re going to need to be constantly engaged to make the most of your trading.

First, you’ll need to buy bitcoin or some of the popular altcoins. You’ll want something that you can take to a cryptocurrency exchange to buy the particular coin you want to day trade. In addition to finding the right coin to invest in by carefully researching companies, you’ll want to find a trading platform with low fees to allow you to trade with high frequency.

Cryptocurrency trading

Practice first

Before you actually put money into a system and start trading, there are tools available to mock-trade to get a feel for it. A good place to start would be which lets you set up a mock account and practice trading for free.

By doing some practice runs, you can fine-tune your goals and gain/loss thresholds to help you develop an investment strategy. It’s critical that you formulate a strategy so you’re not just winging it. The strategy has to be more developed than simply ‘making money by day trading,’ you need a full plan with the companies to invest in, the amount of money to invest, your buy/sell targets and many other factors considered.

Accept your losses

Our next piece of advice is to be prepared to have losses, and accept them when they happen. No day trader is 100% successful, and it’s important to not ‘chase’ your losses. It’s normal to want to immediately claw them back right after it happens, but that is trading on emotion, which never works well.

One way to help accept losses is to set a ‘stop loss’ threshold. Set a threshold that you’re comfortable with, and always cut your losses at that point. It could be 10%, but consider it carefully and set it yourself. Most trading platforms will even let you automate such a threshold, helping you avoid big losses.

Set your targets

One of the most important concepts of day trading are setting target gains. Since the goal is to take advantage of small, high-frequency gains, these targets are often as low as 1%. Your targets may be different depending on the particular currency or market forces that you’re monitoring, but the more locked-in these rules are for you, the better your long term chances of success are.

Having a decent ‘bankroll’ or total amount you’re using to invest with is key as well, and you never want to trade more than 2% of your total bankroll on any given trade. While this may not seem like a lot, it will protect you from losses and allow you to see steady gains to increase the size of your bankroll.

Exchange pairings

In the course of your research, find a particular pairing of different currencies that you believe will yield a gain. For instance, if you felt the price of XRP would increase in relation to BTC, you’d want to make sure your chosen exchange had that pairing. Being prepared to take advantage of a change in the market means having the proper tools to make the trade.

Research, research, research

If you’ve chosen day trading, then research becomes even more important than with standard, buy-and-hold trading. You not only want to know everything about a company, but you want to stay ahead of news announcements, key dates, and milestones for different currencies.

All of these events create good opportunities for short term day-trade gains, but you have to be extremely connected to the information to take advantage. Within seconds of being notified of a press release, you should be poised to act on that information. As more users see the release, the price will increase as they all buy the asset as well, so speed is key. The more time you can dedicate to research and staying connected, the more successful you’ll be.

Have an exit strategy

We talked about stop-loss orders, but you should also have a time-based exit strategy. If you get into a trade and nothing is happening, you may be missing another opportunity elsewhere. Don’t waste time on a stagnant trade.

Setting a reward-to-risk ratio is another good way to set an exit plan. Let’s say you enter a trade worth $1.00 USD. You might set your stop-loss threshold at $0.90, and your gain target at $1.20 for a ratio of 2:1. A good range to target for day trading is somewhere between 1.5:1 to 3:1.

Knowing how much you can afford to lose is a key exit strategy too. Once you hit that threshold, stop trading for the day. Digging in and trying to claw it back will likely result in more losses. Creating these structures will help you be successful in the long run.

Сryptocurrency trading strategies


Alternatives to day trading

If you still want to invest in crypto, but don’t have the time or skill for day trading, you can engage in a longer-term strategy. Such a ‘hold’ trading strategy where you keep an asset for an extended period of time became known as HODL due to a misspelling in a user forum years ago.

While it may require less daily research into your coin, you will want to really know everything about that company and what’s to come of it before entering into the trade. Keep tabs on the company and make sure they are making milestones and fulfilling promises made. Be ready to exit if they aren’t.

Swing trading has many of the same strategies as day trading but over longer time spans from days to weeks. Being very familiar with upcoming announcements and events surrounding your currency is key here.

ICO’s are also a good investment strategy, and by researching the best upcoming ones, you can get in on the ground floor and if it’s a company you really believe in, you can often get a good position in the HODL.

As you can see, research and planning are key. Just jumping in will almost certainly end in big losses for you. The goal is to get to the point where you can exchange some of your altcoin or bitcoin for USD or any other currency and collect your gains. By following some of the rules we shared, and being disciplined in your approach, you can make good money day trading cryptocurrency.

Post written by Darya Karatkevich
Darya is a blockchain market observer with 5+ years of experience as an author and editor for major tech blogging platforms. Her fortes are blockchain technologies and solutions, cryptocurrencies and crypto-related regulations.

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