Cryptocurrencies have become a major asset class for slightly over a decade. According to CoinMarketCap, there are now over 18,000 digital currencies that have over $2 trillion in market cap. Analysts expect that the industry will continue growing in the coming years as regulatory clarity improves. In this article, we will look at how to trade cryptocurrencies and some of the best day trading strategies to use.
How to trade cryptocurrencies
The first step to trade cryptocurrencies is to find a broker or exchange that is accepted in your country. There are several types of companies you can choose from. First, there are centralized exchanges like Coinbase, Binance, and Kraken, among others. These firms offer a complete suite that you can use to trade thousands of digital assets.
Second, there are other platforms that are not owned or controlled by any single individual. These decentralized exchanges (DEXs) are useful ecosystems in terms of data privacy and how they execute orders. Their orders are fulfilled using a liquidity pool that is provided by investors looking for a yield. Examples of these decentralized exchanges are Loopring and Uniswap.
Third, you can opt for a forex and Contracts for Difference (CFD) broker that has some cryptocurrencies in its ecosystem. In these platforms, you will be able to trade digital currency pairs like ETH/USD and BTC/USD with leverage.
Finally, it is possible to use traditional brokers like Schwab, Robinhood, and TD Ameritrade to trade cryptocurrencies and their indices.
Types of cryptocurrencies to trade
There are different types of cryptocurrency assets that you can day trade. Let’s look at them below.
- Spot cryptocurrencies – These are popular cryptocurrencies that are transacted at their present prices. For example, if you buy Bitcoin at its current price, you have just executed a spot trade.
- Futures cryptocurrencies – These are financial derivatives that let you bet on the future of a coin without owning them. A common example of this is known as a perpetual future.
- Leveraged tokens – These are unique tokens designed to help you generate supersized returns. An example, a token is ADABULL/USDT 3x Long Cardano token. It means that when Cardano goes up by 1%, this one will rise by 3x.
- CFD – A CFD is a financial asset that tracks the price of another asset. For example, if you buy a BTC CFD at $42,000, it means that you own a representative of the coin.
With this in mind, let us look at some of the top cryptocurrency day trading approaches you can use.
Most day traders do their analysis and then implement trades manually. One of the fastest-growing day trading strategies in the cryptocurrency industry is the use of robots, also known as expert advisors. These are tools that are programmed using different parameters that analyze and execute trades.
For example, a trader who uses a combination of technical indicators like envelopes and Klinger oscillator can create a program that mirrors manual trading. In this case, the robot will open a bullish trade when the cryptocurrency moves above the envelope and when the oscillator moves to the oversold level.
Anyone can build a trading robot provided that they have vast trading and coding experience. The alternative is to buy a robot that has already been developed. Most people choose the latter option because very few of them have a combination of trading and software development experience.
There are benefits of algorithmic trading in the cryptocurrencies industry. First, the robot can work for a longer time than humans. It can work on a 24/7 basis. Second, a good bot will always set the take-profit and stop-loss to prevent excessive losses. Third, a bot can analyze multiple cryptocurrencies at the same time.
Scalping is another popular day trading style for cryptocurrencies. It involves buying or shorting cryptocurrencies and then exiting the trade within a few minutes. In most cases, scalpers hold a trade for less than five minutes. The goal of this approach is to make a tiny profit per trade and then repeat the same process several times per day. For example, if you make $20 twenty times a day, that is a cool $400.
There are several strategies for scalping. First, you can decide to use a technical indicator like the Volume Weighted Average Price. In this case, you can buy when a cryptocurrency moves above it or short when it falls below. A good example of this is shown in the chart below.
Second, you can focus on price action, which involves looking at chart patterns and then predicting the direction of the cryptocurrency. Broadly, there are two main types of patterns in this type of analysis: continuation and reversals.
Continuation means that the coin will keep moving in the original direction, while a reversal means that the coin will start a new trend. Some of the most popular continuation patterns are bullish and bearish flag and cup and handle, while reversals are wedges and double top. Therefore, after spotting a pattern, the trader will execute a trade, wait for a few minutes and then close it.
Scalpers also identify candlestick patterns like doji, harami, and engulfing to predict where the coin will go to.
Following the trend
Another day trading style for cryptocurrency traders is known as following the trend. This is where you identify a cryptocurrency that is moving in a certain direction and then follow it. If it is falling, just short it and then close the trade after making a small profit. Traders combine their visuals with some trend indicators like Moving Averages and Bollinger Bands.
For example, in the chart below, we see that the Algorand price is in a steep downward trend, and it is below the 25-period and 10-period Moving Averages.
Therefore, since the bearish trend has momentum, the trader would short the coin and then take a small profit as its price drops.
In this article, we have identified some of the most important strategies when you are day trading cryptocurrencies. These strategies also work when you are looking at other assets like stocks and commodities. The secret to success is to spend a lot of time in practice.