Before we get the low-down on how day trading works in the cryptocurrency world, we first need to get the basics right and figure out what the term actually means. 

The crypto trading world is very different to what came before, but it is easier to stick to using the existing lexicon and terminology when we are discussing the fast-paced trading approach of day trading in crypto.

How does day trading crypto differ from traditional day trading?

In the conventional financial markets there is an “open” and a “close” to the trading each day, in most cases, and traders who are more focused on the daily time-horizon are called day traders. This contrasts with, for example, institutional investors, who would design their trades with months or years in mind. This is not the case with cryptocurrency where trading can be done 24/7.

But still, the crypto world uses the “day trader” term, which refers to several important characteristics.

First, when someone refers to crypto day trading they are talking about the process that is distinct from long-term trades, such as buy and hold strategies and value investing. A second possibility is that they might simply want to emphasise the continual activity of making profits on a regular basis and during short periods of time. For example, by buying and selling assets within a single trading day.

Day trading crypto has many of the dynamics of day trading in traditional markets. For example, you may want to use technical analysis, such as support and resistance levels, and other sophisticated charting systems. On the other hand, fundamental analysis, which is very commonly used in traditional markets, is harder to use with crypto, Peter Kotov, analyst and trader at Gulf Coast Crypto, explained to TradeSanta: 

It’s more difficult to forecast supply and demand of any particular cryptocurrency as the fundamentals are not as clear as they are with traditional markets,” the expert noticed.

Importantly, day trading in both crypto and traditional trading heavily relies on volatility. 

Since volatility with cryptocurrency markets causes price turbulence literally all the time, this affords a good chance to many day traders to net profits in a quick manner. 

Let’s take a look at some of the common misconceptions concerning day trading and also consider the risks associated with it.

Day trading is not the same as scalping 

Some people argue that scalping and day trading are, in fact, the same trading styles, because with these patterns, trades take place within one day. However, they are not the same. 

Scalping is one of the most challenging trading styles because traders need to utilise the shortest time frames, which creates a very high-pressure situation. 

Over a period of one day scalpers open and close multiple positions in an effort to net profit on minor fluctuations in price.

So essentially this approach gives them access to a greater number of trading opportunities; plus, they’re less exposed to risk since the value of each trade is really small.

In contrast with scalpers who place dozens of trades in a single day under the thinking that insignificant moves in price are easier to profit from, day traders might open no more than one or two positions per day since their focus is on the best opportunities.

Compared to scalpers, day traders normally hold the position for several hours but less than one full trading day. 

Swing trading isn’t equal to day trading

Swing trading is another approach popular within the groups of traders attempting to capture gains over a period of several days to a couple of weeks.  

They enter and exit the market sporadically based on current opportunities. Since their positions are opened longer than those of day traders or scalpers, they often go with both fundamental and technical analysis. 

This also explains why swing traders tend to wait longer for a trade to develop and tend to use risk instruments, such as stop-loss or take-profit orders. They have more time on their hands.

Compared to day traders who might want to spend more time in front of their screens over a period of one day, swing traders often stick to their trading plan to close their positions, in which case crypto bots sound like a useful solution.

The risks of day trading crypto

Day trading, just like any other type of trading, is risky. But it is even more so in the context of the high-volatility crypto market. 

When investing in cryptocurrencies you should remember that the risk of your exchange getting hacked is substantial. This is particularly bad news for day traders: with day trading, you are likely to keep your money on an exchange because it’s very inconvenient to transfer coins from a cold to hot storage several times within a short time period. 

And of course, before investing in a coin you should try and research the project, because the levels of volatility in crypto markets mean that even projects with a weak business model can peak for a while and mislead you as a day trader.  

Day trading in crypto is risky,” Peter Kotov told TradeSanta, but he also added that there are certain economic indicators out there to help you with the process. Those indicators are just harder to spot, but you can consider a leading indicator, for instance, an inverted yield curve, as opposed to a lagging indicator like MACD. 

A bit more complicated indicator might be sentiment analysis on social media,” the expert added.

To put it all together, day trading in crypto is not much different from day trading in traditional markets except there are certain risks associated exclusively with trading cryptocurrency. 

If you look at the trading process from a time-scale perspective, you see that day trading would exist somewhere in between scalping and swing trading in terms of timeframe, and this in turn defines the set of tools traders use for this activity.

But with all the types of crypto trading, as much as with day trading in particular, you should approach the market only after thoroughly researching the coins and assets you’re about to trade.