We started the discussion on cryptocurrency trading strategies in our previous article with an overview of the crypto market. Therefore, having this understanding lets take this discussion further by looking at short-term crypto trading strategies to maximise profits.
Source: admiral markets
As the name implies, day trading means any trading technique that aims to produce profits from trade decisions within a day. Day traders spend time monitoring the charts after they have made an entry so that they can cash out on price movements in their direction.
Trading instruments are the various securities or markets through which traders implement their trading decisions. Not all financial market instruments are suitable for day trading based on their framework. We will look at some crypto markets instruments that day traders use for trading.
This is one of the most common types of crypto trading instruments found in the market. Crypto swap is the process of exchanging one crypto for another crypto.
In crypto swaps, the two currencies are listed in pairs, and price action goes in the direction of one coin. Therefore, as the price of one currency goes up, traders exchange their pair, whether long or short.
Another characteristics is that the trader owns the unit of those cryptocurrencies that have been swapped, and they can withdraw it to their wallets.
credits: the merkle
Contract for difference (CFD) is a type of financial instrument that allows people to trade assets, without actually owning them. Compared to crypto swaps CFDs traders can choose to withdraw it into the wallets and spend as they like.
Crypto CFD(and all other types of CFDs) doesn't give that ownership.
With CFD, the trader can take either long or short positions, while crypto swaps only allow the trader to take long positions. This flexibility means that a trader can make money in any direction that the market goes.
Source: coincodecap
These kinds of trades allow the individual to trade with more capital than they own, by borrowing extra funds from the exchange. Other financial markets like forex and stock markets also use the leverage trading instrument. Because traders borrow the amount used as leverage, it usually attracts some interest payment. This situation makes leverage trading unsuitable for other types of short term trading, as some exchanges will charge overnight interest on open positions.
Now that we have looked at some of the instruments for day trading, let us take our discussion further by examining the types of order. An order is an instruction that is given to the exchange to execute a trade. It could be an instruction to buy or sell. The major types of trading order are:
This is an order to enter or exit a trade at the market price. If a trader chooses this option, the trade will be executed immediately at the prevailing market price.
This type of order comes to play when the trader does not want to enter or exit the trade at the prevailing market price. Limit orders are recorded in the order book and executed when the price reaches the limit set by the trader. Because the order book displays this kind of order, other traders can see areas of crucial resistance or support before they happen sometimes.
Also, when a trader places a limit order to buy, the funds are reserved in the account until trade execution.
A stop order is very similar to a limit order in the sense that the execution is not instant. A stop order refers to a request to buy at a specific price. The order is executed, once it gets to the stop price. However, stop orders do not appear in the order book, and funds are not reserved for the trade.
Technical analysis is the process of using statistical tools like charts and indicators to observe the market trend and determine the most appropriate entry/exit price. The objective of technical analysis aims to understand the sentiment of the market by observing the trade history on charts, and using that information to predict what direction the market will go.
Technical analysis uses tools like charts and indicators. Some traders use only charts, some indicators and others a combination of both tools.
The most common types of charts used for technical analysis are
credits:coindesk
A line chart connects all the closing prices for the period, to form a continuous line. With the use of line charts, a trader can easily spot the trend that the market is going. The straightforwardness of the line charts makes it reasonable for new traders to utilise and comprehend.
However, due to the restricted data used to build the diagram, experienced traders will utilise this graph, alongside other mathematical tools to formulate their own strategy..
A candlestick chart shows the opening and closing price per time/period. For instance, if a trader chooses a 30 mins candle period, each candle on the outline speaks to a time span of 30mins, with the lower end demonstrating the least price inside that time, and the upper end indicating the high price. The shading blue and red are used to show the sentiment of the market for that period, with blue shading speaking to a bullish market and red, a bearish market.
credit:www.ig.com
Bar charts are fundamentally the same as candlestick charts the way that it likewise shows the opening and closing cost per period. The only difference between bar charts and candlesticks is that candlestick charts use the colour on the candle body to show the relationship between open and closed positions. In contrast, the bar chart focuses more on the closing price of the asset, in connection with the previous periods.
However, these differences are minor, so as such, both chart patterns can be used for the same type of technical analysis.
We will look at some short-term crypto trading strategies that day traders can apply in cryptocurrency trading . With short term strategies, the goal is the make profit, within the shortest possible time. A day trader can implement a trading strategy through any of the following approaches enumerated below:
This is one of the most popular short-term crypto trading strategies used by day traders. Scalping means looking for small changes in price movement and skimming off the little profit on top. A scalper does not hold the trading asset for long and does not wait for significant changes before they sell. The scalper aims to make as many trades as possible within a day, with every little difference in price.
By taking advantage of little price movements, and picking small profits per trade, scalping does not take the risk of holding on to a trend to make one huge profit.
From the above diagram, a trader that uses this scalping strategy can monitor the charts using the 30mins window after looking at the market direction from a longer time frame. The support zones above are good entry points for a long position, based on the direction of this chart. Using this strategy, the trader can complete at least three profitable trades in a normal day when the trend is not turbulent.
This is another strategy used mostly by traders in crypto markets, especially in swap transactions. For this strategy, the trader looks for differences in selling/buying price across exchanges.
For example, if exchange A buys bitcoin at a higher rate than exchange B, the trader can purchase bitcoin from exchange B, or any other exchange that sells it cheaper, then withdraw his coins to exchange A to sell. Arbitrage trading is one of the most guaranteed ways to make money trading cryptocurrencies daily. A trader that has access to quick information on these price differentials that happen almost every day can take advantage of them before any correction takes place.
However, the only drawback to this method of trading is that, sometimes, there may be a delay in withdrawing funds from one exchange to another. By the time the funds arrive at the closing exchange, the price may have corrected itself, and that opportunity may be lost.
The diagram below shows how this strategy works.
Credits: medium
Swinging is the longest of the three short term strategies, but with the highest profit potential from a single trade. Here trader usually hold the position for more than a day, sometimes even spanning into weeks, and a few months.
A swing trader looks at the market trend for a period, usually more than a day, and spots critical support and resistance zones. After reviewing these zones for trend reversals, the trader executes his trade at a position where he can move in the direction of the new trend.
credit: medium
Looking at the diagram above, the swing trader stays on the trend to pick up the most profit from that trade. Compared to scalping, the swing trader doesnt look for multiple opportunities of picking little profits. Instead, the trader waits on trend reversal opportunities, after studying the market direction for the period.
Traders does not have to monitor the screen so actively within a single day like some other short term strategies.
The answer to this question is none. All strategies listed above can be employed to make money from the crypto market. Therefore, the trader should adopt the strategy that aligns well with his trading appetite.
In summary someone who has the time, and patience to monitor charts can use scalping strategies, while someone who does not have much time to watch their trades actively can adopt swing trading strategies or arbitrage trading.
