By Larry Wright
Introduction
When it comes to investing there are many people who start it as a side hustle. Those who are not well versed in investing and financial education might need to stay connected to the investing world around the clock.
However, there are different types of trading options available for consumers based on requirements and skill sets. Day Trading is one such trading strategy that is suitable for investors who wish to manage their time more efficiently.
What is Day Trading?
Day Trading is a type of investment option that grants investors the freedom from remaining connected with the stock market 24/7. It is also a good starting point for investors who are just getting started and want to set their feet in the market first before making big jumps.
Day Trading is often known as Intraday trading and it means that the traders sell and purchase investment options within 24 hours. The investors who Day Trade need to find out the most volatile investment products such as stocks or commodities that they can liquidate and convert into profit before the day ends.
How Does Day Trading Work?
Day Trading is a simple method of trading that requires the investors to locate the highly volatile trading options. It is important because the investors are looking to turn up a profit with their investment position within a day.
At first glance, Day Trading can seem fairly simple. However, it requires a considerable amount of market knowledge and trading experience to find the best possible short-term trading opportunities. The Day traders essentially create short-term trading positions.
It means that they focus on small market movements. A day trader is not looking to hold the asset for more than 24 hours and see how the market turns out the next day.
Furthermore, day traders also make it a point to trade only on working days and take leave during the weekends. Traditionally, most investors work around the clock and remain glued to the latest market developments around the clock.
However, despite working for short hours and short-term trading positions, Day Trading does require a massive amount of dexterity and insight into the investment world.
Origin of Day Trading
Day Trading can be dated back to 20th Century Stock Market Trading Practices. The US Security and Exchange Commission made the fixed commission rates for jobbers illegal. Typically, jobbers in US Stock Markets were able to gain a 1% commission on the stocks they purchase or sold per day.
Therefore, the traders suffered from covering the additional 2% commission cost for every trade. Furthermore, the stock markets before the internet and bank wires were less efficient.
For example, the average time settlement period for stock payments at London Stock Exchange was as high as 10 working days. This happened because there was no concept of electronic money transfer.
Therefore, investors took considerable time before making the payments. Modern investors behold that period as the earliest example of Day Trading. However, today technology has advanced and therefore the settlement period has been reduced to 2 working days at most.
In 1971, NASDAQ introduced the first ever electronic virtual stock exchange system which led to the debut of Market Makers eventually. During the 90s, Market Makers established Forex and derivatives day trading after the Dot Com Bubble incident.
What is Day Trading Crypto?
Day Trading is intrinsically suited for the cryptocurrency and DeFi ecosystem. Blockchains are digital programs and they are present on the internet. Therefore, the digital market is online 24/7 and it is accessible to investors without any restrictions.
Furthermore, the DeFi network does not need any approval from banks or any other centralized regulators for the approval of payments. Therefore, in many ways, Day Trading Crypto is already very similar to traditional intraday trading practices.
One little hiccup that can impact Day Trading for DeFi users is that they have to pay the transaction fees and their online services, and providers. On the other hand, sometimes cryptocurrency transactions can take longer than usual time on account of transaction verification lag on the network due to mining competition.
The Crypto Day Traders also have to look out for massive transaction fees that can swallow their profit margins on account of massive volatility factors such as considerable trading volume.
Benefits of Day Trading Crypto
In many ways, Day Trading can be a very rewarding investment technique for cryptocurrency investors. Here are some of the main reasons that cryptocurrency investors lean towards Day Trading:
Volatility
Price volatility is one quality of the DeFi market that is ideal for Day Traders. Day Traders are always searching for assets that can make big moves within small time margins. Therefore, cryptocurrency markets are ideal for them. On average, a cryptocurrency price can move 20% per day either upwards or downwards.
Therefore, no matter which cryptocurrency Day Traders are choosing they are very likely to turn up a profit in constraint time.
Decentralization
Cryptocurrencies are mostly based on a DeFi or decentralized finance setup. It means that the investors do not have to wait for days on end to get the transaction complete. They can verify a transaction within a second and get payment confirmations by using automated protocols.
There is no need to wait for bank orders, legal documentation, and approval wait. Therefore, the DeFi ecosystem is ideal for Day Trading.
Cryptographic Currencies
Before the presence of electronic financial networks, investors were skeptical about conducting online trading. It is easy to send an email from one place to another using the internet. However, when it comes to wiring money or securities, it requires a higher level of security.
Since blockchains and cryptocurrencies are secured by cryptography it is reliable and trusted. Therefore, Day Traders do not have to deal with security issues and can conduct transactions with rapid speed using cryptocurrencies without any reservations or worries.
Liquidity
One of the most important advantages of DeFi networks is readily available liquidity. Day Traders need to sell and purchase cryptocurrencies instantly to generate profits.
Therefore, they can take advantage of different liquidity pools available in the DeFi networks and close their trading position at their discretion.
Short-term Positions
Cryptocurrencies are one of the most suitable investment positions for short-term investments. These currencies are volatile and their prices are subject to market speculation. Therefore, cryptocurrency is a great Day Trading opportunity for investors who wish to work in short-term positions and gain more market experience.
Factors to Consider Before Starting Day Trading Crypto
The cryptocurrency market offers many advantages for the Day Trading option. However, investors should not purchase and sell random cryptocurrencies and expect to generate profits. Day Trading requires a considerable amount of preparation and deliberation.
Therefore, the cryptocurrency investors who are thinking about starting Day Trading Cryto should consider the following factors beforehand:
Spot Stability
The Day Traders who are thinking about trying their hands in the DeFi sector should always gauge the volatility. Cryptocurrencies are known for massive price volatility but it does not mean that investors can throw caution to the wind and purchase just any cryptocurrency.
A Day Trader should measure the price projection for a cryptocurrency using DeFi key indicators and other technical analytical tools. Investors should know if a cryptocurrency is overvalued or undervalued in advance. In this manner, they will be able to able to estimate the ideal time to create and dissolve a new short-term position.
Liquidity
Liquidity is like a lifeline for Day Traders. If a Day Trader wants to generate profit by selling their short-term position as soon as possible, it means that they will need suitable liquidity. Without sufficient liquidity, Day Traders would not be able to sell the required amount of cryptocurrencies within their expected time limit.
Therefore, Day Traders should always ascertain the availability of liquidity before creating new investment positions in DeFi.
Transaction Fees
Transaction Fees can make or break the Day Traders. As mentioned before, Day Traders are counting on making big banks by capitalizing on small profit margins.
However, the revenue for a DeFi Day Trader can get breakeven or turn into losses on account of unforeseen transaction fees. Therefore, Day Traders should always account for all the gas fees and service charges for moving around their cryptocurrency reserves beforehand.
Day Trading Strategies for Crypto Investors
Here are some of the most popular Day Trading practices that cryptocurrency investors can benefit from:
Range Trading
Range Trading is a Day Trading technique that allows investors to invest by picking a specific price range. It means that the investors look for an ideal price range and mark it down as an investment bracket.
The investors should have a good grasp on Candlestick Charts and Support/Resistance levels. Day traders can also make better price ranges using technical analysis tools like RSI and MACD.
The investors can create a new short-term position at the support level and sell the cryptocurrency when it has reached its resistance level.
On the other hand, for short, investors can sell crypto reserves at the resistance level and purchase at the support level. It is important to keep in mind that the longer a cryptocurrency is going to sit at a resistance or support level the better its chances of trend reversal gets.
High-Frequency Reserves
High-frequency trading is a crucial trading strategy for Day Traders. It entails maximizing profits by creating and dissolving short positions in bulk digitally. With Blockchain and DeFi, developers have started to delegate trading bots for performing the same task.
Trading bots can perform thousands of crypto trades in the span of a few milliseconds. However, they require a very high level of skill and knowledge.
A Day trader who wishes to take advantage of trading bots should have a considerable mastery of financial markets and development prowess. Many investors might consider the idea of purchasing trading bots for High-Frequency trading.
However, they should be emptor that reliable algorithms and tested investment techniques are not very readily available. Hedge Funds and private financial markets develop their investment strategies after decades and guard them furiously.
Therefore, the DeFi Day Traders should do their homework before venturing into trading bots.
Scalping
Scalping is like a foundation rule for all Day Trading techniques. It revolves around making big profits from small profit percentages by increasing the reserve margin. Therefore, most Day Traders conduct their businesses using Margin Trading or future contracts.
For Scalping Day Traders must be able to exploit changes in bid-ask spread, liquidity, and other market fluctuations. To make the best use of Scalping, Day Traders must be well-aware of technical analytical tools like trading volume, order book statistics, and the latest market development.
Another important factor to consider for Scalping is risk management. Without proper risk management Day, Traders can face many obstacles with the successful implementation of Scalping in DeFi.
Is Day Trading Crypto Feasible?
A very good question to ask about DeFi Day Trading is whether it is a profitable venture or not. The answer to the question also depends on the reader. If prospect investors ventures into the DeFi ecosystem without minding any technical requirements and conducting proper research they can end up in troubled waters.
However, if the traders fulfill their due diligence and proceed with caution, DeFi Day Trading can be a very rewarding venture. The inherent qualities of DeFi and cryptocurrencies make it an ideal candidate for Day Trading consideration.
Furthermore, DeFi tokens and coins are free from any financial regulations and centralized restrictions. The prices of popular and highly valued cryptocurrencies such as Bitcoin can go up or down by a significant percentage change within a few seconds.
Since Bitcoin is an international investment option, it is also easily affected by macroeconomic factors such as adoption as legal tender or national ban, etc.
Therefore, Day Traders who are just getting started also have a good chance of generating sizeable profits in the DeFi market if they place their bets logically.
Limitations of Day Trading
Time Lapse
Day Traders are almost always in a race against time. They have to make a big decision under the pressure of a constrained deadline. Therefore, time management is one of the most important skills for Day traders.
Furthermore, they should always be prepared to deal with the worst-case scenario and have a good idea about the market to salvage their profits. A severe lack of time can lead Day Traders to deal with a considerable amount of stress and can throw them off balance with any sudden change in the market.
Margin Trading
Day Traders want to identify short-term profit opportunities and capitalize on them by bulk trading. Therefore, most Day Traders create positions on Margin Trading. Margin Trading entails borrowing investment funds that should be paid with interest income. Day Trading contains a heavy amount of investment risk.
Margin Trading increases its risk percentage by many folds. It is a nerve-wracking practice for DeFi investors. Therefore, Day Trading with Margin Trading is most suitable for experienced and well-trained investors.
Expenses
DeFi is ideal for instant settlement of funds that also complements Day Trading. However, investors can lose track of their profits if they have to move one cryptocurrency through multiple platforms.
In case a DeFi Day Trader is moving from one decentralized app to another in search of suitable liquidity they might end up burning their profit percentage in the form of transaction fees and service charges. Therefore, investors should work out the expense calculation for all primary and alternative transaction routes beforehand.
Trade Secrets
Day Trade combined with DeFi Market can carry a massive amount of investment risk. Therefore, it requires a considerable amount of market insight, technical knowledge, legal clarity, and financial research.
Therefore, in some cases, Day Trading is not an ideal starting point for beginners. Furthermore, it can take time for a Day Trader to work out the perfect formulae for profits and take years to grasp the market dynamics.
Financial Scams
DeFi market is filled with speculation and reviews from people around the world. There are many cases such as Faze Clan incident where the investors end up losing money by following unverified financial advice from influencers.
DeFi is a wholly digital platform and cryptocurrency investors are bombarded with opinions and news from countless social media forums. However, in many cases, online publicity can be sponsored and misleading.
Therefore, Day Traders should possess the ability to tackle fake and manipulative news. Some financial corporations can participate in spreading false news about their products to gain traction among investors.
However, it is best to find ways to authenticate the news and conduct in-depth research about a cryptocurrency before selecting it for Day Trading to avoid scams and counter swindles.
Conclusion
Day Trading shares many aspects with DeFi trading. First-time investors should always proceed with caution when getting started. However, there is also a considerable amount of support in DeFi for Day trading such as online communities, blockchain developer boards, blogs, official bulletins, social media platforms, online training facilities, data aggregators, digitized analytical tools, and much more.
With the current amount of backup and support now the current age of knowledge might be the best era to get started with DeFi Day Trading.