What is crypto day trading?

Crypto day trading involves opening and closing digital currency trades within the same day, otherwise known as 'intraday' trading.

Many crypto day traders use centralized exchanges, such as Kraken, to execute multiple trades within a short period—sometimes twenty trades or more per day.

It's important for beginners to note that day trading itself is not a strategy per se. Traders may employ various strategies or 'setups'; however, whether trades qualify as day trades depends solely on their duration.

In contrast, some traders prefer a slower pace, maintaining trades for days, weeks, or even months. Position or swing traders keep their orders open significantly longer than those who day trade crypto.

Crypto markets operate differently from traditional stock markets, in that they do not adopt any regional sessions and do not close on weekends. 

For this reason, a day trade in crypto can be considered as any trade that is concluded within a 24-hour period. Many traders tend to use UTC as the guide to the open and close of a trading day.

For more information, check out our Kraken Learn Center article, What makes crypto 24/7/365

The crypto assets you choose to day trade should generally be those that:

• You have studied extensively over a long period, including backtesting your strategies on them to determine their suitability.

• Suits both your personality and trading plan - some assets can be extremely volatile with lots of trading volume, while others can trade in long, slow trends.

• Is supported by your preferred cryptocurrency trading platform.

An example of a crypto day trade might resemble something like this:

After scanning various crypto markets for opportunities, a trader identifies a potential trade on the five-minute Bitcoin price chart, while BTC is downtrending toward $50,000.

Based on extensive backtesting, statistical analysis, and journaling, the trader formulates an idea for a trade that historically has shown a positive expectation.

In short, they believe that based on all the factors present, there is a good chance that bitcoin prices will bounce once it reaches the $50,000 level.

They decide to set a limit order to buy one Bitcoin at $50,000 and include a stop-loss order at $49,900 to cap their losses should the prices continue to fall.

For more information, visit our Kraken Learn Center article, What are trade orders?

The trader then places a take-profit order at $50,200. After calculating the potential gains and losses of the trade, they arrive at a risk-reward ratio of 2:1 — meaning the intended gain of their crypto investment ($200) is two times their potential losses ($100), before any fee deductions.

The price of Bitcoin dips down to $50,000 as anticipated, and the trader's limit buy order gets filled. In this scenario, however, the market does not bounce as the trader had hoped, and bitcoin's price continues to fall.

The trader's stop-loss order triggers as prices dip below $49,000, resulting in a $100 loss.

Despite being unsuccessful, the trader knows they have executed their plan correctly, and they know that losses are part of the process. Statistically, this will happen a large percentage of the time, and one individual loss does not invalidate their 'edge' – the ability to take advantage of non-random events in the market.

The consensus among some professional traders is that most people, especially those just starting out, should not try to day trade. There are good reasons for this.

The harsh reality is that the overwhelming majority of day traders lose money—the figure that is often cited is 95%. However, there is evidence to suggest that the true figure may be higher.

Here are some key findings from various studies of day traders in traditional markets:

• 80% of traders quit within the first two years.
• Taken together, many studies have shown that upward of 90% of day traders lose their invested capital.
• One study found that only 1% of day traders make money after deducting fees.
• Another study went as far as saying that "...it is virtually impossible for an individual to day trade for a living, contrary to what brokerage specialists and course providers often claim."

There are several reasons why day trading cryptocurrency assets is hard, even when compared to trading on high time frames or regular investing:

• Cryptocurrency markets are extremely volatile, meaning prices can fluctuate dramatically over a short period of time.
• Day trading in general requires great mental dexterity when it comes to making decisions in real-time, something that many traders simply cannot do.
• Because day trading involves making more trades, traders have greater overheads in the form of trading fees (fees charged by the exchange for executing trades). The amount of fees a person may pay can sometimes make the difference between breaking even or making an overall loss.
• Of all the approaches to trading financial markets, day trading is arguably the hardest because of the significant demands on a trader's psychology. Day traders have to be extremely adept at taking losses very quickly, and be able to immediately move on from such losses so that they don't impact on their performance going forward. Taking losses is something that many novice traders find very difficult.

An interesting question to ask yourself is, would you invest in a company without knowing whether it is profitable or whether you would expect a return on your investment? If the answer is 'no', why would you invest? If you cannot answer the same question of yourself with respect to your own profitability in day trading, why would you risk your capital?

To become a consistently profitable trader can take years of persistence and determination (as was the case for many highly successful traders, see "Market Wizards," authored by Jack Schwager).

There is no single way to day trade cryptocurrency. Cryptocurrency markets offer unlimited freedom and creativity, which some may see as both a gift and a curse.

In Mark Douglas' 'Trading in the zone,' he explains that markets afford us a creativity that isn't experienced in other areas of life. In essence, he is referring to a trader's ability to easily take huge risks with devastating consequences.

It is for this reason that it can be easy to both win and lose money in the short-term, but very difficult to hold onto any gains long-term.

Some traders believe that in order for you to be successful day trading crypto, you need to:

• Identify what sort of person you are and generate a strategy based on your personality.
• Understand the fundamentals of trading, such as technical analysis, backtesting, and risk management.

Let's explore some of these concepts in more detail.

Understand how to read charts

While the random nature of markets has been debated for many years (see the 'Random Walk Theory'), many traders believe and act in accordance with the idea that all markets have repeatable, tradable patterns.

There are an infinite number of ways to examine price charts, with thousands of indicators, algorithms, and strategies that can be deployed.

Many experienced traders analyze the price action of cryptocurrencies (the simple movement of price over time) using candlestick charts. Candlesticks offer a way for traders to visualize the movements of an asset's price.

For more information, check out our Kraken Learn Center article, What are candlestick charts?

In addition, many traders use technical analysis to identify trends and patterns on a cryptocurrency's candlestick chart. This can sometimes allow traders to gain insights into the broader market sentiment around a crypto asset, and help them to make better-informed investment decisions.

Timeframes

Crypto day traders are often predominantly focused on the lower time frames, such as the hourly chart (price candles that capture up to one hour of price action), or as low as 1-minute candlesticks.

This approach allows traders to potentially capitalize on small market fluctuations over brief periods, aligning with their strategy of targeting short-term gains.

They may also incorporate data from higher time frames, such as the daily or weekly price charts, in a bid to support their lower time frame decisions.

For example, if a crypto asset like Polygon (MATIC) or Ether (ETH) is trending up on the daily timeframe, it stands to reason that trades taken in line with that bias on the lower time frames stand a better chance of success.

Order placing

There are many different types of orders that are used in financial markets. Typically, a crypto day trader will mainly use two common types of orders that are available on any centralized crypto exchange:

• Limit orders.

• Market orders.

Simply put, limit orders are passive orders or ‘resting orders’ waiting to be filled and market orders are active orders that move the market. 

A limit order is an order to buy or sell an asset at a specific price over a specific period. For example, a trader wishing to buy bitcoin may fill out an order form to buy 1 Bitcoin at $50,000.

For this trade to be executed, the bitcoin price must reach $50,000 and a seller must execute a sell order at this price. The same process works in reverse for those wishing to sell their Bitcoin.

Note that a limit order adds liquidity to a market, as by creating a limit order, you are providing the means for others to trade by putting up your crypto assets for sale.

The order book is simply a collection of all the limit orders in place that make up the market in question.

A market order, on the other hand, is an order that takes an order out of the order book.

Therefore, when executing a market order, a day trader can take advantage of the existing orders to enter a position. If we reimagine the same scenario, a day trader wants to quickly buy Bitcoin at around the $50,000 level.

Rather than completing an order form to place a limit buy, they decide they want to get into their position immediately, and don't want to risk their order not getting filled. So rather than wait for the price to reach $50,000, the trader decides to enter just above this level at $50,500.

When they hit the 'market buy' option on the order form, their $50,000 will be converted to Bitcoin using the closest available sell orders in the order book. For this reason, market orders can result in getting a much worse entry price, because there may not be enough sell orders in the order book to enter the position at the price you want.

This concept is known as 'slippage', and you may sometimes hear traders say they got 'slipped', meaning their market order did not get filled at their intended price level.

It is for the same reason that stop-loss orders (a market order at a predetermined level to close a position) may get filled much lower or higher than was originally intended (if at all).

In short, no exchange can guarantee that you will be able to successfully exit out of your trade, or at the price you want.

Risk management

Good risk management relates to how much of your overall capital you risk per trade, in order to minimize your 'risk of ruin', or losing all your capital.

Risk management is arguably the single most important aspect of being a successful trader or investor.

Risk of ruin is the probability that a trader will lose enough of their capital such that it is no longer possible to recover the losses or continue. In crypto, we call this "getting rekt."

There are many online free tools available where traders can calculate their own risk of ruin.

When attempting to reduce risk, many traders may choose to do the following:

• Set stop-loss orders on all trades.

• Make sure they never invest more capital than they are prepared to lose.

• Perform rigorous due diligence on all cryptocurrencies before investing any capital.

While all of the following strategies can be applied to any time frame, these are often touted as being particularly popular for day traders.

1. Range Trading

Generally speaking, markets behave in two ways; they are either in a trend (up or down) or rangebound (sideways price action).

Strong trends often slow down into a range, also known as a consolidation. Many traders specialize in trading such consolidations, by waiting for prices to reach either extreme, the bottom or top of the price range.

Crypto prices will often 'sweep' or 'deviate' a range - this simply refers to when the price goes temporarily above or below the edges of a range before pivoting back inside. The theory behind such a price movement is that traders are caught offside, stuck underwater in the positions they entered when prices briefly exited the range. Many range traders use this particular price action sequence to enter a trade.

2. Fibonacci trading

Many crypto traders use the Fibonacci retracement tool (derived from the Fibonacci sequence) to identify areas of interest on a chart. By identifying a notable high and low, traders can overlay the fibonacci retracement levels to highlight different areas where the market may reverse from. The most commonly used retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%.

3. Arbitrage

Crypto arbitrage is a strategy that takes advantage of the price difference in a digital asset between two cryptocurrency exchanges. Such a strategy does not use price action per se. Rather, it requires tracking the price of an asset across various exchanges.

For example, let's imagine Solana (SOL) is trading at $100 at Exchange A, but happens to be trading at $120 at Exchange B. If you had funds available on Exchange A, you could simply buy some Solana for $100 at Exchange A, send it to Exchange B, and sell it, pocketing any profit after any fees.

4. Support and resistance flips

It is often said in crypto trading that "former resistance becomes future support," meaning once cryptocurrency prices break through a key level, it can act as support for prices thereafter — at least until market sentiment shifts again.

This event can sometimes create opportunities for day traders. If you look closely, you may notice that the price will sometimes repeatedly test a level before breaking through it.

Once a price has broken through - known as a 'breakout' - it will often return to the former resistance to re-test it as support, producing a reversal. This is known as an 'S/R Flip', because of the flip from resistance to support. The graphic below details how this works in practice.

5. Trend trading

Trend trading strategies endeavor to take advantage of established market trends in an asset, often looking to capture part or most of a particular trend. A common example of such an approach involves using trend lines on a price chart in conjunction with the price action to define the risk and reward of a setup.

Pros

• Day trading enables a trader to ply their craft during specific hours, much like how many others work during predetermined hours. This may be particularly attractive for those with a family or other commitments.

• Being a skilled day trader enables one to grow an account very quickly. Multiple trades can be executed during a short period, which, combined with the effect of compounding, allows for exponential growth.

Cons

• Some people may find executing and managing multiple trades within a single day extremely stressful.

• Day trading requires intense, prolonged concentration on multiple variables (often spread across multiple screens) and therefore can be physically and mentally draining.

• The difficulty of being a successful day trader over a long period means that many day traders are not profitable, and would be better off investing or employing a strategy that is executed over a much longer time frame.

In summary, day trading is arguably one of the hardest ways to generate profit from cryptocurrency markets, as evidenced by the very high failure rates.

For those interested in attempting to pursue this style of trading, it's advisable to be aware of the associated risks and practice using demo accounts first to establish whether this route is suitable for you.

If you're interested in exploring the universe of crypto trading, Kraken provides access to over 210+ assets.

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