Day Trading Cryptocurrency - An Updated 2020 Guide

What is Day Trading?

Day Trading Cryptocurrency Chart

Day trading refers to the act of purchasing and selling assets in short, intra-day time intervals, sometimes spanning mere seconds.

In order to make a return, day traders will employ strategies and analysis that will allow them to predict the market, arbitrage price discrepancies, and take advantage of news outbreaks.

Day traders do not attempt to make a return by holding onto an asset for a long period of time.

How is Day trading Cryptocurrency Different Than Stocks?

Less mature participants

The cryptocurrency market is less developed than the equity markets. There are fewer participants and also fewer sophisticated traders. Therefore, there are typically more opportunities to exploit price discrepancies in order to make money.

High Volatility

Bitcoin Volatility Index

The volatility of cryptocurrency is more than 5 times higher than that of traditional asset classes, with a daily standard deviation of 5%. Traders can take advantage of these price swings for example by employing strategies to buy /sell on extremes and to take profit when the price regresses back to the mean. If played correctly, volatility can lead to more profitable trading.

Lower Liquidity

Because the cryptocurrency market has fewer participants, it is also less liquid. A market is considered less liquid when the order book is thin and trading volumes are low. A thin order book means that buying/selling will cause large changes in the price. This phenomenon is known as slippage.

If you are trading in a market with low volume and liquidity, you need to be careful. Even trades up to $500 can change the price drastically.

That being said illiquidity itself can be a trading opportunity if you are able to exploit it. E.g. Recognizing a price discrepancy caused by illiquidity, and arbitraging it between two different exchanges.

Who Are the Competition?

As a daytrader, you’ll be faced up against some pretty stiff competition such as:

Trading Bots

Trading Bot Art

Algorithmic trading bots are designed to automatically execute orders based on some programmed strategy. They are lightning-fast and much quicker than humans. However, usually, the strategies are set in stone and cannot be changed on the fly.

If you are trading by hand, you cannot compete against a trading bot on execution speed and data-ingestion speed. Anything that is difficult only because you need to ingest a lot of data, monitor prices, and execute trades quickly, becomes trivially easy for a machine.

However, anything that is ambiguous and circumstantial is something that humans will often have an edge in.

That being said, engineers and algo traders aren’t the only ones who can employ trading bots. There are a few good options off the shelf that you can configure to supplement your trading strategy. We’ll talk about this more in a later section.

Other Day Traders

Other than machines, you’ll be trading against other human daytraders who are pitted against you. The market is often referred to as a zero-sum game because your loss is someone else’s lunch money.

Whales

Whales art

Whales are participants with a lot of money who can change the market with large trades. They don’t always play fair and can sometimes manipulate the market with large globs of capital.

One example of such a strategy is called stop-loss hunting.

Stop-loss hunting

Whales intentionally push the price down in order to trigger stop-loss orders. Then they turn around and buy coins from these stop-loss orders for cheap while waiting for the market to recover.

This strategy works well for coins with low trading volumes and small order books. With enough coins, whales can push down the price by introducing a slew of market-price sell orders.

To show how this works, let’s imagine a scenario:

  • There is a coin trading at $150
  • There are 10 BTC of buy orders between $110 and $150
  • There are 10 BTC of buy orders between $90 and $110

The goal is to drive the price down past $100, which may be a psychological breaking point for some people and therefore a likely place for stop-losses.

One can do this by:

  1. Placing a market sell order totaling 10 BTC, to drive the price down from $150 to $110
  2. Keeping the sell pressure on, as investors naturally start selling their holdings.
  3. Watching people’s stop-losses go off at $100 without their knowledge. This drives the price down further.
  4. Buying up all the stop-loss orders at $90 and under.
  5. Waiting for the market to recover before selling the coins.

In this article, I go into detail on the strategies whales use to manipulate the market

What Are the Strategies Used

Technical Analysis (Trend Analysis)

Technical analysis is bread & butter for most day traders. These kinds of traders use indicators and charts to help them make predictions about how the market is going to change. It is quite a difficult thing to do for both humans and trading bots alike and take a lot of practice to get right.

Here are some of the most popular technical trading indicators:

Moving Average Convergence Divergence (MACD)

The MACD indicator is calculated by subtracting the 26-day exponential moving average from the 12-day.

When you plot the MACD, you get a chart like this.

MACD Indicator

The important thing here is to note when the MACD and average lines cross. If the MACD line crosses up through the average line then it is considered a “bullish crossover”, which is a standard recommendation to buy. If it crosses down, then it is considered a “bearish” crossover and the recommendation is to sell.

The crossovers are indicators that the price is about to accelerate in the direction of the crossover.

Bollinger Bands

Bollinger bands are a set of lines plotted two standard deviations away from a simple moving average.

Bollinger Band

When the bands close together, it is called a squeeze. A squeeze signals a period of lower volatility. A break out happens when the price moves past the range of the Bollinger band. Some view this as a trading signal, others as a simple sign of increased volatility.

For more resources on technical analysis feel free to check out these resources:

News/Sentiment Trading

When important news breaks, it will often have an effect on the price. Some traders use news breakouts as an opportunity to predict the market.

Example of news outbreak that has been linked to price movements:

News trading works better during a bull market when market participants are more sensitive and actually paying attention.

It is also important to note that the market may already have predicted the news and priced it in. Therefore a news breakout can often have a null effect or even an opposite tone.

Market Making

Market Making

Market making is a strategy where the trader simultaneously places both buy and sell orders in an attempt to profit from the spread between the highest bid and the lowest ask, otherwise known as the bid-ask spread.

Market makers stand ready to both buy and sell from other traders, thus providing liquidity to the market.

Example:

If let’s say, BTC is trading at $17,000 a pop, you create a buy order for $16,999 and a sell order for $17,001. When both orders get filled you earn $2, the spread, for providing liquidity to other traders.

Arbitrage

Arbitrage

When you buy an asset in one market and simultaneously sell it in another market at a higher price, that’s called arbitrage.

There are two different ways to arbitrage cryptocurrencies. The first is by finding prices mismatches through different trading pairs on a single exchange. The other is by locating price differences across multiple exchanges.

Inter-exchange arbitrage opportunities are more readily available because there is additional complexity associated with having to withdraw assets from an exchange.

During the legendary kimchi premium, Bitcoin traded close to 40% higher on Korean exchanges compared to US exchanges. Arbitrageurs made a profit by buying Bitcoin on US exchanges and selling it on exchanges where BTC was trading higher.

Kimchi Premium

Futures, Shorting, Leverage

In order to trade in both directions, traders need to be able to short. The most common way to short cryptocurrency is by using futures contracts.

Example of a futures contract:

A futures contract is an agreement to sell or buy an asset at a specified price at some future date.

In order to take a short position, a trader can take on an obligation to sell some amount of cryptocurrency at a specified price in the future.

e.g. I’m going to sell 1 BTC at $9,000 on May 3rd, 2020.

If the price goes below $9,000, then you make money on the expiration date.

Contract expiration & Roll-over

If you don’t want to settle the contract and the expiration is near, you can rollover your contract by selling the contract and buying another one with a longer expiration date. This allows you to maintain your position.

On Bitmex there are future contracts with automatic rollovers, known as perpetual contracts, that you can buy so you don’t have to worry about this.

Margin Call

Margin Call

In order to enter into a futures contract, you need to have an initial amount of collateral on hand. The amount of collateral you need will increase if your futures contract moves in the opposite direction you’re betting on.

If you cannot pony up enough collateral to meet the margin requirements, then your contract will be liquidated and you will lose all your money to the exchange.

Leverage

Leverage gives you access to more capital so you can trade with more money than you have. You are essentially loaning money to trade.

Here’s the catch. Just like futures contracts, you need to have a certain amount of capital as collateral. If the value of your collateral shrinks because the asset you bought goes down, then you will be margin called by the lender. This means that you lose all your money to the house.

Bitmex Liquidation

Typically the more leveraged you are, the larger the amount of collateral you will need, and the less wiggle room you will have before you get margin called.

Be very wary of this because the cryptocurrency market is so volatile. If you are not careful, you can quickly lose a lot of money by making leveraged trades.

BitmexRekt tweets these liquidations in real time. You can follow them here.

Using Tools to Help You

Trading Bots

Day traders don’t need to do everything by hand. In a market dominated by trading bots, if you can’t beat them, join ‘em.

There are several trading bots with configurable options off the shelf that you can employ as your own. In order to help you choose the best one, we wrote a guide on the different kinds of trading bots in this article.

Just as a disclaimer, HodlBot is an example of such a bot. HodlBot makes it easier for daytraders to create custom portfolios.

Create your own portfolio HodlBot

HodlBot also makes it easy to switch between positions with a click of a button.

Switch between portfolios HodlBot

Portfolio Viewers

Delta Portfolio Viewer

Because you will likely have your cryptocurrency split up amongst many exchanges, a good aggregator is much appreciated. A portfolio viewer tool like Delta will aggregate all of your assets so you can see it in one place.

Charting Tools

Trading View

For technical trading, you’ll need a good charting tool. Tradingview is a very popular trading tool amongst technical traders. You can draw charts, look at candles on a tick by tick basis, and much more.

Written by Anthony Xie

I’m the founder of HodlBot.

I’m a big data nerd. I like to talk about all things data, finance, and crypto. You can find me on Twitter here.