Day trading cryptocurrency can be an incredibly profitable venture for people who put in the work and implement the best practices. When done right, it has the potential to turn a marginal amount of money into a retirement funding. However, day trading cryptocurrency is exceptionally volatile and is not going to suit everyone. With an estimated 95% failure rate for all day traders, the potential highs come with the potential for extremely low lows. Although you can make a lot of money very quickly, that means that you can also lose a lot in a very short time.
Could day trading cryptocurrency be right for you? Learn how it works and educate yourself about the risks, as well as the best methods for success, before making any decisions about the practice.
What is day trading cryptocurrency?
In general, trading is buying an asset to then sell it and make a profit. Whether it’s the stock market or cryptocurrency, the purpose of buying an asset is the same: to make a profit simply by selling it for more value than you paid for it. The most significant difference, however, between trading cryptocurrency and non-digital assets is the volatility. Prices can change far more quickly with cryptocurrencies, resulting in extremely high volatility.
In just one day, prices can vary in either direction by up to 50% with cryptocurrencies. The top four cryptocurrency coins at this time are Bitcoin, Ether, Ripple, and Bitcoin Cash.
There are two types of trading: long-term and short-term. The type is determined by how long you keep an asset before selling it. Each type of trading is suited for specific kinds of objectives. While long-term trading is drawn out over an extended period and, in turn, is far less stressful, day trading is very short-term trading. This means that you sell your asset before the end of the day with the objective of making a fast profit.
Moving so quickly comes with a high level of volatility but, if you keep your assets small, you limit the risk. And although the profits would be small, they can be worthwhile since such minimal time was spent on these earnings. With day trading, assets can be sold within a matter of seconds or a few hours, but it is always done on the same day.
How to Trade
There are many different methods that you can use to day trade, but speculation and chart analysis are the main ones.
When certain events occur in a market or industry, a trader may speculate that this will affect the value of an asset. Nothing is guaranteed in these cases. Experience and having a deep understanding of how a specific market works and reacts to different incidents is likely to help a trader use this method more effectively.
Slightly more scientific in its method than speculation, chart analysis is when traders look at trends by examining the fluctuations in the price of a specific cryptocurrency. Based on its previous patterns, the traders then guess how the price will change next. These charts can show you how a price changes every few hours, minutes, or even seconds.
What are the risks?
Before deciding on day trade, you must know and accept the risks that come with it.
Slow starts and capital loss: In the first year of day trading, 80% of traders have been shown to fail. This is likely due to a lack of education and experience, underscoring the importance of practicing with demo accounts and learning from credible sources before beginning to day trade with real assets.
Psychological addiction: The volatility, constant vigilance, and potential for high earnings (as well as high losses) can create an adrenaline rush or dopamine hit to which traders can get addicted. This can become dangerous if the brain learns to crave these highs consistently. Pay attention to how you are reacting to trading and, if you are predisposed to any forms of addiction, consider whether this is a healthy context for you.
High stress: Day trading requires you to always pay attention; the work is never done in this rapidly-changing world. It is time-consuming work that can create a lot of stress, but the people who stick with it may feel that the potential reward makes it worth it.
Inaccurate information: There are a lot of opinions about the value of a coin or how prices will move, but everything is merely speculative in the industry. When trading decisions are made based on information that turns out to be inaccurate, it can lead to major losses. This underscores the importance of knowing what credible sources are.
Tips for Trading
When getting started with trading, make sure to implement the following best practices:
Only trade money that you can afford to lose
As was mentioned in the previous section, day trading cryptocurrencies comes with much volatility and predictions will not always be accurate. Losses will happen; even the masters of day trading still lose from time to time. Trading can be a worthy risk, but it is a risk, so trade wisely and make sure that your survival will not be affected if you do lose.
Never chase your losses
When a loss does happen, the most important thing is to never chase your losses.
This means don’t take high risks in an attempt to make back any losses you experienced. The best advice is to accept that losses will happen and to move on, which is why the first tip was so important!
Before you start trading to any extent, get as much practice as you can bear with demo accounts. This allows you to learn without the risk of real losses. Coins2Learn and BitCoinTradingSites have been recommended as places to start.
While a lot of information is available on trading, there is also much misinformation. Make sure to identify the credible sources. Additionally, try to build a relationship with a mentor who has been successful in trading. Practicing with a demo account is an essential part of building your education about trading.
Steps to Success
1. Learn about blockchain
Day trading is incredibly fast-paced, and you will need to act quickly, but it is still critical that you understand the technology behind what you are trading to make good decisions. That technology is blockchain, and knowing the basics about it will equip you to trade more wisely with your digital assets.
2. Learn what currencies you should trade
There are over 1,200 coins, and new ones are always entering the market. Research to find the coins with the least volatility and the greatest chance of having long-term value. Bitcoin, Ripple, and Ethereum are recommended as the top three coins.
3. Do your research before investing in altcoins
Less known coins may have short-term benefits but come with greater risk. Many of these coins are “pump and dump” scams or even Ponzi schemes that have artificially increased their prices through hype or speculation. Eventually, they crash, and so do your funds.
4. Sign up for an exchange
All currencies are traded against Bitcoin and Ethereum, so it is important to acquire some of these coins by paying with fiat currency. All the transactions are shared in exchanges, and many have been hacked, so it is essential to choose the correct exchange to make sure your coins are secure.
5. Learn the basics of day trading
Cryptocurrencies are always traded in currency pairs. Purchasing a currency allows you to view its value in relation to another (mainly ETH or BTC). The prices of cryptocurrencies are always changing, so you can make decisions that take advantage of these fluctuations and earn you more ETH or BTC.
6. Learn to market, limit and stop orders effectively
Market order is the simplest trade. It is immediately buying or selling at the coin’s market price.
Limit order is setting the price at which you want to buy or sell. When it hits that limit, then your account will complete the transaction immediately.
Stop orders reduce risk of losses and guarantee profit from successful price movement. If the price of your coins drop, then your coins will be sold at a specific price to limit your losses.
7. Learn advanced trading analysis
There are several kinds of analysis that can help you assess currencies and make informed projections: fundamental analysis, technical analysis, sentiment analysis, and momentum analysis.
8. Follow cryptocurrency news
Cryptocurrency is a rapidly evolving world, so it is important for traders to constantly stay updated on the latest developments in the field.
9. Only invest amounts that you know you can lose
Only invest money that you can afford to lose. No loss should affect your life in a fundamental way.
10. Have an exit strategy
Decide how long you will be in the trade and how much you can afford to lose. This helps you keep tabs on how you are doing and discern when you need to get out.
Day trading cryptocurrency can be an exciting endeavor with the potential for great earnings, but it also comes with a handful of downsides. The high stress, large time commitment, and constant volatility just aren’t for everyone. But there are strategic methods and best practices that can help to manage the risks and increase the chances of successful day trading.
It is important to keep in mind that beginner traders undergo a lot of losses before they become successful. Starting small and only trading the money you can afford to lose is what makes the difference between the traders who fail and the ones who stick with it.