Recently, crypto volatility has picked up again due to the DeFi and yield farming boom. You might perceive crypto volatility as something bad, however, for day trading crypto it’s beneficial. It provides cryptocurrency day traders with plenty of possibilities to make quick profit trading volatility swings on the daily charts.
However, it’s not easy to be successful at day trading crypto. It requires a lot of emotional control but also a consistent trading strategy. You want to lock in profits frequently. Without a trading strategy or routine, it’s hard to know where to start your day trading journey.
In this article, we’ll give you actionable tips to get started with crypto day trading. From tips about selecting the right cryptocurrencies to defining your day trading strategy to picking the right trading indicators.
First, a quick word about how to day trade crypto.
As mentioned in the introduction, the success of day trading crypto is often correlated with the volatility of the cryptocurrency you are trading. A higher volatility means you can benefit from small daily swings on the charts. Even when volatility isn’t high, you can still make a modest profit from day trading crypto.
However, it’s important to know that other elements matter besides volatility. For example, many crypto day traders prefer to trade the news. Whenever a project releases a new update or completes a milestone on its roadmap, you can trade this positive news to make a profit.
Of course, you have to monitor the news actively. The downside of this approach is that projects don’t release new functionality daily. Therefore, fewer opportunities arise when trying to day trade cryptocurrencies.
In the end, what matters most is having a consistent trading strategy. Let’s discuss a step-based plan to get started with crypto day trading.
Here are five steps to define your crypto day trading strategy.
First of all, let’s pick a handful of cryptocurrencies to trade. It’s much easier to monitor just a few cryptos than monitoring 30 different coins. Also, this allows you to learn about the details of each crypto project and monitor them closely.
Ideally, we want to pick coins with high volatility as well as high liquidity. Therefore, let’s limit our search to the top 100 coins on Coinmarketcap sorted by market capitalization. Cryptocurrencies with a higher market capitalization have more active traders, and so, more people actively trade trading patterns. The more people trade a particular asset, the easier it becomes to trade according to well-known patterns.
Whereas it’s much harder to reliably trade patterns for low volume projects. A single buy order can completely change the market dynamics for a low volume cryptocurrency. On the other hand, it can be very lucrative trading small market capitalization projects. Higher risks translate into higher potential profit.
In short, make sure to pick between five to seven high volume and high volatility crypto projects you want to actively monitor.
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Crypto trading does not only consist of staring at charts, education plays an important role. Try to stay up to date about the crypto markets and what’s trending right now. Therefore, I recommend creating a habit to spend 30 minutes reading the crypto news.
Education is important as you want to stay on top of trends. Besides that, it helps you to stay up-to-date with the crypto projects you’ve chosen. These extra insights can make or break your trade.
Say your indicator shows a strong buying opportunity, however, you just read some slightly negative news about the project you’re trading. Therefore, you can take into account this information when making a trading decision. In other words, you can gain an edge over other traders by not only looking at the charts but also educating yourself about the crypto industry and monitoring updates coming from crypto projects.
As IG.com explains, “trading indicators are mathematical calculations, which are plotted as lines on a price chart and can help traders identify certain signals and trends within the market.”
Moreover, indicators are a great tool when it comes to trading cryptocurrencies. They provide you with insights about the market. Most traders like to use indicators as an alerting mechanism to notify them when potential trading opportunities arise.
Two of my most popular trading indicators are the Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI) indicators. The MACD indicator detects changes in momentum by comparing two moving averages. Hereby, traders can identify buy and sell opportunities close to support or resistance levels.
Furthermore, traders commonly use the RSI indicator to identify market momentum. The RSI indicator is plotted as a number between 1 and 100. Whenever the RSI rises above a value of 80, it means that this asset is overbought. While the opposite is true for an RSI value below 20. This indicates that an asset is oversold. It’s a very reliable indicator as it’s one of the most popular indicators among crypto traders.
In summary, it makes sense to pick a few reliable indicators that help you to make better trading decisions. You don’t want to pick more than five indicators as it becomes harder to cut down on the noise.
Recommended read: What are crypto trading signals and how can they improve your day trading strategy?
Next, setting targets helps you better control emotions while trading. It’s important to limit losses by setting a stop-loss target. The stop-loss target will sell your trading position once it hits a predetermined price. Make sure to give your trade plenty of breathing room as you want to avoid cutting off short your trade; losing money.
On the other hand, we also want to set a take-profit price. For example, you can set a take-profit order 5% above your buy-in price. Here, the take-profit target will automatically close your position and lock in profits.
Why do both stop-loss and take-profit matter? Image a situation where a project gets hacked and you are asleep. The price of the project drops by 30% overnight, meaning you’ve lost a lot of money. By setting a stop-loss price 3% below your buy-in price, you can control the risk you take per trade. Nobody wants to lose 30% of its trading budget within a single trade. Be smart and set targets!
YouHodler’s Multi HODL tools allows you to set Margin Call level to use it as a stop loss function. Users can also set their own Take Profit to help them manage all their positions effectively.
Trades go wrong as you make mistakes. For that reason, we should try to learn from our mistakes through reflection. This is an essential part of becoming a better trader.
For example, your RSI indicator showed signs that the price should go up, however, the price dropped. Maybe you have missed an obvious trading pattern or learned about a pattern you didn’t know before. A good way to reflect on your trades is by looking at the ideas traders share via TradingView.
Often, you’ll find alternative ideas about the market. It’s a great resource for evaluating your thought process when day trading cryptocurrencies.
This article answers the question of how to day trade cryptocurrencies. To summarize, having a plan with targets makes it much easier to day trade cryptos. However, don’t expect the trading plan itself to be a shortcut or an instant guarantee for profitable trading. Day trading crypto still requires a lot of effort and time to master.
You’ll have to spend time learning about crypto markets, indicators, and macro trends while staying on top of crypto news and project updates. Furthermore, you’ll experience how hard it is to control your emotions while trading crypto.
If you want to give crypto day trading a try, set yourself realistic goals. Start slowly with a goal to make a $500 profit in your first month of trading. Don't expect to become a professional crypto trade in a matter of one month.
Finally, I want to share a diversification tip with you that includes the Barbell strategy. The Barbell strategy is based on the 80/20 principle where you invest 80% of your funds into a safe, high-yield savings account, such as YouHodler, while you use the remaining 20% for trading. This way, you balance out the potential losses of your trades using the passively earned money from your savings account. You can create this trading strategy using YouHodler’s features of savings accounts + Multi HODL