Common Day Trading Indicators
Traders who implement crypto day trading strategies use price trend indicators to help make buy or sell decisions. Below are some commonly used indicators in crypto day trading.
On-balance Volume (OBV)
On-balance volume is a momentum indicator that shows whether cumulative volume is flowing into or out of an asset. If OBV rises, the market is interested in buying. Conversely, low OBV indicates high selling pressure.
Accumulation/Distribution Line (ADL)
A volume-based indicator that shows the flow of money into or out of an asset. This indicator helps traders determine whether an asset is being sold or bought in the market. A rising ADL means high buying pressure, while a falling ADL means high selling pressure.
Relative Strength Index (RSI)
The RSI is an indicator that measures price changes and their speed from 0 to 100. An RSI above 70 means the asset is overbought, while an RSI below 30 indicates the asset is oversold. The RSI is used to identify potential rebounds and calculate entry and exit timing.
Moving Average Convergence Divergence (MACD)
The MACD identifies momentum and trend direction using two lines: the MACD line and the signal line. If the MACD line crosses above the signal line, the asset is likely to enter a bullish zone. Meanwhile, if the MACD line crosses below the signal line, the asset enters a bearish zone.
Fibonacci Retracement
A crypto day trading strategy indicator for identifying support and resistance levels. This indicator uses Fibonacci patterns to find levels where prices are likely to stall or reverse in a certain direction. These levels include 23.6%, 38.2%, 50%, and 61.8%.
Also Read: What is Fibonacci in Crypto Trading?
5 Crypto Day Trading Strategies
There are various crypto day trading strategies. Here are some of the most popular methods.
Breakout Trading
Breakout trading is one of the most popular crypto day trading strategies. As the name suggests, traders look for crypto assets that have been moving sideways for some time, then wait for a “breakout,” or a significant price shift, before buying or selling.
How to implement the breakout trading strategy:
- Identify support and resistance levels using a 15- or 30-minute timeframe chart.
- Set notifications for when the price approaches these levels.
- When a breakout occurs with significant volume, enter a position.
- Set a profit target of 2-5%, depending on the asset's volatility.
- Set a stop-loss below the breakout level to avoid losing capital.
Momentum Trading
Momentum trading is a crypto day trading strategy that takes advantage of the strength of ongoing price trends. This strategy assumes that assets moving in one direction will continue to move in that same direction in the short term.
How to implement the momentum trading strategy:
- Use several technical indicators for crypto analysis, such as Moving Average and Relative Strength Index (RSI).
- Identify crypto assets that are showing an increase in price and volume.
- Enter a position when momentum is clearly visible, for example, when the RSI moves above 60.
- Set take profit based on the nearest resistance level.
- Secure profits using a trailing stop.
Scalping
Scalping is an extra-intensive crypto day trading strategy. Traders sell or buy crypto in a matter of minutes to make small but consistent profits.
How to implement the scalping strategy:
- Use a 1-5 minute timeframe chart.
- Focus on tight bid-ask spreads and high trading volume.
- Check liquidity levels through the order book.
- Aim for small profits (0.5-2%) per transaction.
- Pay attention to platform fees so they don't eat into profits. Choose an exchange with low fees.
Mean Reversion
While momentum trading assumes prices will continue moving in the same direction, mean reversion assumes the opposite. This crypto day trading strategy assumes that crypto prices will return to their average value after extreme shifts.
How to implement the mean reversion strategy:
- Use indicators to detect extreme conditions, such as RSI and Bollinger Bands.
- Enter a short position when the RSI is above 70, which indicates that the market is overbought.
- Enter a long position when the RSI is below 30, which indicates that the market is oversold.
- Target profits when the price returns to the moving average.
- Set a tight stop loss, as prices can continue to move into extreme zones.
Arbitrage
Arbitrage is a crypto day trading strategy that takes advantage of a crypto asset’s price difference on two different exchanges.
How to implement arbitrage trading:
- Create accounts on several reputable exchanges.
- Monitor crypto prices on various exchanges. Use tools like CoinMarketCap to simplify this process.
- Buy crypto on an exchange where the asset is undervalued (lower price).
- Immediately sell on an exchange where the asset is overvalued (higher price).
- Mind slippage and platform fees on each exchange.
- Use bots for automated trading.
Risks of Day Crypto Trading
Crypto day trading offers potential for quick profits, but this strategy still carries several risks that beginners should be aware of.
Liquidity and Slippage Risks
Not all assets are suitable for crypto day trading due to a difference in liquidity. In addition, assets with low trading volumes are prone to slippage, which is the difference between the expected price and the actual price.
Overtrading
Many traders fall into the trap of overtrading. They make too many transactions in a single day due to fear of missing out on opportunities or want to “take revenge” after experiencing losses. This is influenced by psychological factors, so crypto day trading strategies must be carried out with a high level of vigilance and focus.
False Signals from Indicators
Even when using technical indicators such as RSI and Moving Average, the numbers on the indicators cannot be trusted blindly. There is a possibility that the indicators are only showing false signals.
An analysis shows that the accuracy rate of the Exponential Moving Average for Bitcoin during 2017-2023 was only 53.33%. Meanwhile, the accuracy of Bitcoin’s Relative Strength Index in the same period was 75%. This means that technical indicators are not always correct. Traders should use indicators as tools to aid in decision-making, not as absolute guides.
Common Mistakes in Crypto Day Trading
There are several common mistakes to avoid in crypto day trading.
- Overtrading: Too much trading in a short time frame can lead to platform fees stacking up.
- No risk management: Always set a stop-loss for every transaction and don't invest all your capital in one transaction.
- Revenge trading: Sometimes traders want to “take revenge” after experiencing a loss. However, they may end up suffering consecutive losses because they are not making rational decisions.
- Not doing research: Always apply technical and fundamental analysis in trading. Learn how to read price charts and prepare a strategy for making decisions.
- Lack of discipline: Don't abandon your strategy because of greed or fear.
Conclusion
Crypto day trading is challenging, but if done correctly, traders can earn consistent daily profits. For successful day trading, you must practice discipline and use the right trading strategy. Try practicing with a demo account before investing your real funds.
Day trading is just one of many common crypto trading strategies. Learn various crypto trading strategies in the article Crypto Trading Is: Definition, How It Works, Types, and Strategies to Maximize Profit.
