Over the past decade, Bitcoin has become an increasingly more important financial asset for investors all over the world. Though Bitcoin no longer maintains the nearly $18,000 maximum it achieved in December 2017—currently, it is trading for around $6,500—these figures are both still significantly higher than they were just a few years ago (usually trading for well below $5 per coin). Because of the incredibly volatility and trading volume that can be witnessed with Bitcoin and other comparable cryptocurrencies, Bitcoin has naturally attracted the interest of both day traders and long-term investors.
Bitcoin was originally introduced in the year 2009 as the world’s first digital and decentralized form of currency. Operating as a medium of exchange—comparable in many ways to paper currency—Bitcoin is accepted by an increasing number of vendors with each passing year. As a cryptocurrency, the supply of Bitcoin is naturally limited (and consequently, valuable) and the use of cryptography helps to keep ownership of a specific coin perpetually secure.
Bitcoin attracts traders and investors for a variety of different reasons. The asset itself possesses a high potential for returns, is shielded from certain market hazards, and experiences a tremendous amount of movement on any given day. However, despite these apparent benefits, trading Bitcoin is not without risks. The coin does experience frequent decreases in value on both a daily and long-term basis (especially between 12/2017 and 10/2018).
In this guide, we will discuss the most important things for you to keep in mind as a cryptocurrency day trader and how you can effectively use bitcoin to increase your daily rate of return. Because the cryptocurrency market is relatively new and unexplored, it is generally considered to have both a high possibility for daily returns as well as a risk of daily loses. Being able to pursue returns while simultaneously avoiding risk will ultimately prepare you to be a successful cryptocurrency investor.
Why Bitcoin Makes an Excellent Day Trading Option
One of the reasons that many people are hesitant to enter the cryptocurrency trading industry is the fact that the market is quite volatile. After all, a simple look at the past year of Bitcoin prices will clearly demonstrate that this is not an asset that is ideal for building your retirement savings. However, from the perspective of someone who is day trading—entering and exiting various positions within the same 24 hour period—volatility can often be a very good thing.
Using strategies such as momentum trading can help you attach yourself to a given currency as it begins to accumulate in value and exit your position before the value increase has diminished. This strategy will require you to consistently monitor the direction of prices throughout the day, which makes it exceptionally compatible for individuals who are day traders. Taking advantage of a volatile, decentralized, and modern type of currency is one of the ways that momentum trading can be most effectively utilized.
The Difference between Day Trading and Holding Bitcoin
Though both day traders and long-term investors have the same underlying objective—entering a position and then exiting a position at a relatively higher price—the ways in which these trades are executed will be significantly different. While long-term investors have to think about whether a given cryptocurrency will significantly increase in value over time, day traders only need to think about how the value will change by the end of the day (or in some cases, even less).
As a day trader, daily volatility, trading volumes, and the cost of trading will all need to be closely monitored. Instead of looking at moving averages as they occur over a 100-day or 200-day timeframe, you should focus on moving averages that are 1, 3, or 5 days old. This will help you be able to correctly identify if a position in the Bitcoin market is actually worth taking—remember, it is never a wise idea to assume a short-term position simply for the sake of trading.
Things to Watch for When Day Trading Bitcoin
The Bitcoin market is without a doubt rather unique, but that doesn’t mean that it exists in a vacuum. There are many different indicators you should look at before deciding whether or not to assume a given position.
· Pay attention to other cryptocurrencies. Bitcoin is like the “American Dollar” of the cryptocurrency market in the sense that is more connected to the activities of other currencies than any others in existence. Paying attention to other cryptocurrencies—such as Ethereum Bitcoin Cash, Ripple, Litecoin, etc.—can help you identify the potential for movements in the industry as a whole.
· Pay attention to day trading alternatives. Many day traders invest in both the cryptocurrency market and the stock market. Though the correlation between these markets is not exceptionally strong on a macro level, if the stock market is particularly weak on a given day, the opportunity value of investing in cryptocurrency will consequently increase.
· Pay attention to Bitcoin specific news sources. There are countless different news sources that are specifically committed to trading Bitcoin. This includes Cryptocoin News, Crypto Insider, Bitcoin Magazine, and many others. If you can dissect and act upon news more quickly than other traders, you will ultimately be able to beat the market to a price increase.
· Pay attention to the relationships between price, moving averages, and trading volumes. Though doing this will require a bit of technical analysis, understanding how specific events (such as when China made a major bulk investment in Bitcoin) connects with various metrics will prepare you to be a successful investor.
Though day trading will certainly require you to act with a sense of urgency, you should never do so while you are uninformed.
Developing a Bitcoin Day Trading Strategy that Works
As stated, momentum trading is an approach to trading that allows short-term investors to minimize the risk of continued price drops and minimize the risk of holding onto a currency for too long. Additionally, day traders should recognize that cryptocurrency should never be traded without the use of stop orders (or even limit orders).
Stop orders allow traders to exit a position as soon as a price has dropped before a certain level. Though executing a stop order will result in a loss of wealth on a given day, it is an effective way to control the amount of wealth you stand to lose. Limit orders also make it possible for you to exit a position once your gains have reached an acceptable level.
When compared to other financial assets, your limit: stop order ratio for cryptocurrencies should be relatively high (5:1 is a good starting point). As long as you are able to protect yourself from risk, recognize when price increases are most likely to occur, and close your positions by the end of the day, you should have what it takes to be a successful Bitcoin day trader.
Conclusion
Bitcoin is one of the more volatile trading assets, which may initially deter some long-term investors. However, Bitcoin’s unique characteristics also make it something that can be quite useful for day traders. Taking the time to understand the variables that make the cryptocurrency unique and to develop a comprehensive trading strategy will help you enter the market with the awareness that you need to succeed.
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