Cryptocurrencies have become one of the most profitable assets to trade in recent years. Most investors in the space favor the hodling strategy, whereby they purchase a crypto coin and hold it for long periods of time in the hope that its price will eventually rally. However, this strategy better suits large-scale investors who can afford to brace the losses from day-to-day price fluctuations. For most retail investors, a day-trading strategy is best, as it presents opportunities to profit from daily price movements.
Popular day trading strategies
Arbitrage
This is a strategy that aims to take advantage of the price differences of cryptocurrencies across different exchanges. It entails buying a coin at the cheaper exchange, then immediately selling it on the other exchange where its price is higher. The price difference, less any trading costs, is taken as profit.
Usually, this strategy targets crypto pairs. For instance, a pairing of BTC and a lesser-known altcoin may be priced cheaper on Kraken than on Binance. Arbitrageurs would then take advantage of this price difference for profit. Since humans cannot effectively discern these price differences, this strategy often involves using automated trading programs. It has the advantage of maintaining the price stability of similar assets across exchanges.
Bot trading
This is whereby traders utilize automated software to execute trades on their behalf. It entails defining a trading strategy that the bot follows. The bot then scours the markets in search of opportunities satisfying your defined parameters. Since the crypto market is open 24/7, these bots are capable of spotting and capitalizing on more trade setups than humans. What’s more, you can customize such things as applicable risk management measures, so your bot maximizes profits while reducing the risk of loss.
There are several ready-made bots available on the internet, but it’s always best if you can create one tailored to your personal needs. The good news is, on some platforms, such as Bitsgap, you can create bots without writing a single line of code.
The long straddle
This is a derivatives trading strategy. It involves buying two options contracts on the same cryptocurrency, bearing the same strike price but in offsetting positions. Therefore, to execute this strategy, one would buy a call and put option for the same coin, with the same strike price and expiration date. This best suits instances when you anticipate future volatility in the underlying asset but you are unsure of the direction of price movement.
To demonstrate this, consider a trader who buys a call and put option on BTC, with a strike price of $35,000. The cost of each contract (premium) is $2,000. To break even, the value of the profitable option must incorporate the premium paid for both options.
This means that if BTC’s price breaks to the upside, it must reach $(35,000 + 2,000 + 2,000) = $39,000, on or before the expiry date for the trader to break even. If the coin’s price plummets, then it has to reach $(35,000 – 2,000 – 2,000) = $31,000, or else the trader makes a loss. Any price above $39,000 or below $31,000 would place our trader in profit.
Range trading
This is a strategy that capitalizes on consolidating markets with no discernible trend. Oftentimes, in such instances, prices tend to religiously adhere to support and resistance levels. The strategy entails buying at support and selling at resistance. Since this technique yields small profits per day, one may have to enter multiple trades to accumulate a substantial profit.
To help identify these entries and exits, one can use an oversold and overbought signal indicator such as the RSI. Above is an illustration of this strategy on an Ethereum price chart.
Scalping
This is another popular day-trading strategy that aims at profiting from small price movements. However, it is better suited for trending markets and cryptocurrencies with high liquidity levels. It involves buying and selling these coins in several short trades. Due to the high number of trades involved, most scalpers prefer to utilize bots to enter trades from signals of technical indicators.
The illustration above showcases a scalping strategy on a Binance Coin (BNB) price chart. We used the Bollinger Bands indicator to inform our trades, entering long trades when the price crossed above the middle band and selling the coin whenever the price went below the same band. This yielded three profitable trades.
Advantages and disadvantages of day trading crypto
Pros
- Other than verifying your identity and funding your exchange’s wallet, there are no barriers to entry into the crypto trade. Even if you cannot afford $40,000 for Bitcoin, you can purchase a fraction of it or any other coin you wish to trade.
- The crypto market runs non-stop, which translates into more trading opportunities for traders.
- The decentralized nature of these markets helps facilitate trades without an intermediary, thus kicking out potential fraudsters. Smart contracts also ensure the settlement of all transactions as agreed.
Cons
- The low barriers to entry attract inexperienced traders who end up making losses.
- Crypto is a largely unregulated space, which means there is no governmental oversight to protect investors’ funds from malicious cyber attacks.
- Oftentimes, investors fall prey to pump and dump schemes, whereby a group of traders artificially pumps up a cryptocurrency’s price in order to attract unsuspecting traders. The orchestrators of the scheme then liquidate their positions, leaving other investors holding on to worthless assets.
In a nutshell
Though still in their teenage years, cryptocurrencies have gained widespread popularity among traders and investors. Most large-scale investors prefer to buy and hold these coins in the hope that they will rally in the long term. However, most retail traders are better suited to day trading these digital assets. To that end, there are several techniques for profiting from the daily price movements of these volatile markets.