What is Day Trading?

5 mins read April 13, 2021

What is day trading?

Day trading is a form of short-term trading that is popular in the world of stocks and cryptocurrency. Day trading is the act of buying an asset at a particular price, holding onto the asset until it appreciates in value and then selling it at that high price with the intention of making a fast profit, all before the day is over. Day traders often hold on to assets for as short as a few seconds and as long as a few hours before selling them off in order to make a profit. With cryptocurrency’s reputation as a volatile asset, day trading serves as a way for individuals to earn money faster.

The opposite of day trading is a long-term strategy called HODLing (an acronym meaning “Hold On for Dear Life”) which is where traders hold on to an asset for a very long period of time with the hopes that it would continue to increase in value before they can finally sell it for a profit.

What to know about before you start day trading

Trading crypto is risky, the same way trading stocks and commodities like gold and silver are risky, and so it helps to know a few things that would guide your decision to be a day trader.

Do a lot of research: Day trading can be difficult. You need to be alert all of the time, watching your assets and preparing to sell, which is why the first thing that you should do is conduct your research. Read as many articles and guides as you can and gather enough resources and information that can empower you and give you more knowledge on what day trading is all about. A practical approach would be to first test out day trading on trading simulators which would give you a hint of what actual trading is like without risking actual money.

Understand that cryptocurrencies are very volatile: You have probably heard this one a hundred times but it is very important that you keep it in mind. One minute bitcoin could be reaching for the skies and the next it’s falling and taking a deep dive. You could make some predictions and speculate, but predictions aren’t always accurate and you might turn out to be wrong. Accepting the fact that crypto is extremely volatile and understanding how that can affect day trading is crucial to your start as a day trader.

It is okay to lose: Face it, you can’t always win, and as a matter of fact, you won’t always win. This might be a little hard to swallow, but the earlier you understand it, the better you are at accepting your losses. Like we’ve said, trading crypto is done mostly by trying to predict future prices and speculating, and this isn’t always correct, so there’s a pretty fair chance that you would incur losses sometimes. Losses happen, and when they do it is important that you do not chase them. Chasing losses, essentially, is when a trader makes a significant loss and then tries to make it all back by taking huge and uncalculated risks.

Set targets: One way to mitigate these risks and cut down on your losses is to set goals. Once you’ve done your research, had some practice, and are fairly confident in your knowledge of how the markets work, you can decide to set some targets before you start actively trading.

3 Common day trading strategies

Day traders often use different strategies to make a profit within a 24-hour period. The following are the most common strategies often used and as a beginner, you should look for one that you are most comfortable with. It is worth remembering that cryptocurrencies are highly volatile and traders depend on this to make a profit, but when not properly done, it may also cost a trader dearly. Our best advice is to know your strength and understand properly whatever strategy you choose to use.

So, let's get into it:

Scalping is a short-term trading strategy popular among day traders. The trader (scalper) uses small price movements that happen within short time spans to make profits repeatedly. Scalpers are more particular about technical analysis than fundamental analysis and so often use strategies such as order book analysis, Bollinger Bands, volume heatmaps and a number of other technical indicators. There is still a lot of risk around scalping particularly because of the need to execute trade fast and also because of the small percentage price targets. For this reason, it is mostly suitable for skilled traders.

Range trading is another strategy used by day traders. Range trading involves creating new trade ideas by identifying consistent high and low prices in a market structure. These high and low price ranges are also known as resistance and support bands. This strategy relies heavily on resistance and support levels as well as the use of the candlestick chart analysis. In range trading, the support and resistance levels will act as the edges of the range and will do so until there is a breakout. Traders will often buy at the support price and sell at the resistance price until a breakout occurs.

High-frequency trading (HFT) is a form or system of algorithm trading that is used by quantitative traders. This type of trading involves a lot of speed, speedy trade executions and large transactions all within a short timeframe. HFT makes use of algorithmic trading that requires special equipment and computers. The algorithms are used to analyse similar digital assets across multiple exchanges. There are several key factors of high-frequency trading such as the use of speed for generating and executing orders and short time frames for liquidating positions.

How to start day trading

Pick a good cryptocurrency exchange. There are two major types of exchanges; there’s the traditional exchange which is common and where they often serve as the middleman to help facilitate their trade, while peer-to-peer exchanges just provide a platform for buyers and sellers to connect without interference from middlemen, except in the case of a dispute. To start trading, ensure that you choose an exchange that you are comfortable with because this is where you will be spending most of your time. One good thing about crypto exchanges is that they are always open 24/7 so you can trade at every and any hour that you want.

Deposit some money into your account. It’s a good idea to start with very small amounts and gradually work your way up as you get more comfortable and experienced with trading.

Don’t stop accumulating knowledge. Read as much as you can, gather and filter out information that could guide you, and do not stop practising.

Final Thoughts

Day Trading, like any other trading strategy requires careful analysis and execution. The crypto space is known for its high volatility which often makes investments risky. However, by using a strategy you feel comfortable with and understand as well as doing proper research, then day trading can be a very productive strategy.

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.

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