From personal experience, the cryptocurrency trading world serves as an intricate network of investing opportunities. The logistics behind being successful are not much different than what you would notice when trading Forex, stocks and so on. You need to be coherent when it comes to news and fundamentals. But, for real results, you’ll also need to know what not to do when day trading crypto to be profitable in the long run.
I’m going to share some insight from my years of personal trading experience. Some of you will know better than to make some (or all) of these mistakes. As many have, I’ve become a great trader by learning and growing from my errors.
#1 Trading with Insane Leverage
Poloniex was my introduction to margin-based trading. Their leverage only went up to 2.5x which meant getting liquidated was rare — a 40% move would either liquidate or double my position. My ability to call profitable day trades and swing trades was pretty impressive at the time.
Eventually, the volume died down on Poloniex (around when the “Trollbox” was removed). Many users migrated to Bitmex as they offer both the “Trollbox” and leverage-based trading. The interface at Bitmex is very user and beginner-friendly. Check out our ‘Bitmex trading guide’ to speed up the learning curve process…
Anyway, on Bitmex you can day trade Bitcoin with 100x leverage which is way too high. The market only needs to move by 1% (less due to fees) to wipe out your position. I did pretty well at first (before the bull run over $5,000) but eventually, it became impossible to be profitable at even 25x leverage.
Many changes in the crypto world caused higher leverage to become useless. The main difference is that, with more traders involved, the whales had a reason to “wash trade” the market. They would purposely pump/crash the price 1-3% regularly which made it impossible to properly time your entry. Plus, Bitmex charges 15% for market orders which means closing a losing trade never makes sense.
Further, as prices fluctuated dramatically between exchanges, the prices on Bitmex and the spot prices were out of whack; if you go short on a CFD at Bitmex at a price lower than Bitmex’s spot rate, your position could even liquidate from a smaller (.25-.5%) price movement.
Stick with Low Leverage
My recommendation to you:
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Avoid high leverage like the plague until you have enough experience and bankroll control to make it work. The only way this trading style will be effective is if you make trades with a fraction of your bankroll, ideally while trading at no more than 25x leverage.
For most traders, 2.5x is the safe sweet spot. It’s just enough that your gains are considerably larger yet your chance of getting liquidated isn’t significantly higher. This leverage level is even useful if you want to day trade small price movements. If I could turn back time, when I left Poloniex for Bitmex — I would’ve controlled myself and stuck with 2.5x or so.
However, 5x would be good with tight stops near breakout points (or fallthrough tests, if shorting) if you’re trading based off of TA alone. Meanwhile, 10x would be good for the breakout or crash moments that you catch immediately after a news-based catalyst.
Depending on the circumstances, I see an argument for entering right before the breakout/crash or after a confirmation candle (with volume) shows. Again, use tight stops and — make use of this trading function, don’t think you can manually time the market!
In fact, manually executing your stops is another mistake that myself and many other crypto day traders made earlier in our careers. Why? Because, if the price moves against you, you become more expecting of a bounce in your favor — sometimes that never happens!
#2 Failing to Understand Risk Management
If you understand technical analysis and how to trade, the next challenge is controlling your bankroll. I didn’t bother with this little effort because I thought I could keep snowballing my account balance higher. When I started a risk management strategy, my capital saw a much more stable, yet aggressive, level of growth.
I recommend that everyone reads our piece called “Risk Management Basics for Crypto Traders”. This article will help you get an understanding on how people manage their bankrolls to protect their capital, maximize their gains and secure their profits.
Risk management is very important!
To better understand why it matters so much, look at the difference your capital planning can make in your gains/losses:
You can change your profitability level by taking trades that are statistically more profitable in the mid to long run. By switching up how you play your bankroll, how much you use in one trade, etc., your profitability will be much greater long-term!
#3 Misunderstanding Risk-to-Reward Ratio
Ever hear of “risk-to-reward ratio”?
I didn’t care about this in my early days. I realized that, as altcoins became less volatile, risk-to-reward ratios play a key role in profitability as a day trader. Personally, I found it to be especially important when leverage trading Bitcoin and other high market cap alts.
A lot of mistakes are made because people trade based off of emotion, gut instinct, news and others advice. We want to be more systematic, trade with our brains and act as “human trading bots”, does that make sense?
This term refers to the amount of risk versus reward for a particular trade. The calculation is done by looking at where you will cut your losses or take your profits. If a coin is worth $1 and you sell at a loss for 90 cents or a gain for $1.10 that would be a 1:1 risk-to-reward ratio. However, if a coin is worth $1 and you sell at 90 cents or $1.30 that makes it a 1:3 risk-to-reward ratio.
As a crypto day trader, your goal is to gravitate toward such setups. With a 1:3 ratio, being profitable means hitting your profit targets on more than a third of your trades. Take a look below for a better idea on how these calculations are done.
WARNING: Risk-to-reward ratios alone do not tell the full story. If you start with $6,000 and drop to $5,400 from a losing trade, a 10% gain will not bring you back to break even. These ratios only apply on a trade-by-trade basis; you can replenish the lost funds each time you enter a new position to make your calculations more straightforward. For profitability purposes, your risk management strategy must consider this fact!
Should you really be trading based off of risk-to-reward ratios?
So, some beginners will start using these ratios to determine which trades to take. This tactic is often a mistake because the risk-to-reward doesn’t tell you how good the trade is.
The key is to find trades that have the technical analysis to support your calculated risk-to-rewards. Many beginners will just say “I will sell if the price falls XX percent, but I’m anticipating a XX percent pump to happen so I’ll sell at that higher price.” They tend to look at their bankroll and think “I’m okay with losing (gambling) XX dollars for the chance to make XX on this trade… Instead of factoring the coin’s price, TA, news, sentiment, etc.
Many day traders look for breakout and fallthrough points and open a position when the TA supports a potentially violent price move. When you catch these positions, it’s clear the reward side is high.
These trades come with minimal risk… Your percent loss will be much less when your stop hits if the breakout/fallthrough fails, but if you’re right — the upside will be significant. Even so, your success will be dictated by both your trade calls & your risk management strategy.
#4 Buying News/Pumps “Just Because”
Day trading crypto is harder now than it was in previous years. The market has matured and far too many cryptocurrencies exist now. Even just the leading exchange, Binance, is home to more than 300 different altcoins.
As a result, big waves are harder to form (and sustain) for many low to mid-level market cap coins. The market cannot support day traders as well as it did before; with a greater selection of coins to trade, it’s important to know how to spot “momentum” in a coin (and its community!).
We’ve also noticed a change in how the market works in recent years.
The massive bear trend after MtGox’s crash, which found strong support at the $220 range, prevented most altcoins from gaining much momentum. Meanwhile, the trend reversal was a catalyst for an altcoin bubble where plenty cryptos went up 10-50x in only 1-2 years.
The exacerbating pace of growth in the crypto world throughout 2017 put many eyes on altcoin day trading as a profession. Before it was mostly die-hard enthusiasts and hobbyists (quite a few with backgrounds in Forex, online poker, etc.) and the market was easier to time. Now, between more players, a currently crashing BTC and too many coins to trade, the trading mentality is a bit different…
Before it was “Buy the rumor, Buy the news!”
Then it became “Buy the rumor, Sell the news!”
In 2018, we’re at “Just sell the rumor!”
A great example of this claim exists in Request Network (REQ). This coin had major expectations when it was in the ICO phase. In fact, it raised nearly $33 million yet the market cap currently sits at only $45 million — after reaching more than $550 million last year.
Interestingly, everyone waited for the mainnet release with expectations of a bullish price correction. The coin kept dropping in satoshi value while Bitcoin’s value dropped at the same time. In fact, after the $6,000 bottom in February 2018 the value of REQ versus Bitcoin didn’t go up much at all.
The mainnet release saw the coin pump back to the satoshi price range it was in just two weeks prior. Meanwhile, many other alts tested much higher resistance levels without any major development/news releases.
Why did this happen?
The liquidity in REQ was stagnating in early 2018 because the coin had so many bag holders and so few day traders. The project wasn’t considered “respectable” until the mainnet release came out. Many investors that bought back in September of 2017 looked for any chance to sell and move on from their losing trade. Meanwhile, many swing traders and day traders bought into the hype of the mainnet release leading up to the event.
The bigger players took advantage of this and sold the rumor AND the news. WHY? Because, the whales bought into a coin that failed to become a hot crypto to trade and the sudden demand gave the market makers a chance to exit without crashing the price too hard.
Fast-forward to June of 2018 and we saw REQ drop down more than 75% from the coin’s highest price of 2018 alone. The coin’s low came after their PwC and Wikipedia partnerships + Shopify plugin at below 1,200 satoshis while the high was a month after their heavily anticipated mainnet release at more than 3,000 satoshis. The price is less than 10% of the all-time high, leaving many investors with no choice but to hold in hopes of a total recovery and fresh crypto bubble.
My point here is that the altcoin market sentiment shifted over time. What was once a winning strategy is no longer effective. You can’t hype yourself over an investment opportunity that “seems obvious”, especially if it’s been known about for a while. There is indeed a “crypto graveyard” that’s starting to grow; be careful which altcoins you choose to day trade.
You don’t know these things if you don’t experience them. Hopefully my write-up will give you a better idea; take the time to observe changes in the crypto markets as you trade so you know when (and how) to switch up your trading strategy.
Good Luck Trading!
I’ve shared some personal experiences that cost me tens of thousands of dollars. I still kick myself for not catching these mistakes sooner; the opportunity cost I suffered is potentially 6-7 figures.
Quick tip: “Opportunity cost” is another important term to learn. If you sell coin A to get into coin B and A goes up 50% but B stays flat, your opportunity cost would be 50% of your trading capital.
In 2018, however, cryptocurrencies have established themselves as tradable assets. The sheer number of investors in the crypto space right now is crazy. Profitably volatile coins are still possible to find for an altcoin day trader. However, you must be more protective of your capital now than ever — if not, you will go bust before hitting your big scores!
It’s not the early years of crypto anymore. We’re in the middle… But that’s a great thing because it means you can generally form/support day trading positions based off of technical analysis alone. Our “Scalping 30 Minute Trades – Day Trading Guide” piece can really help you with spotting and playing these profitable setups.
And if you’d like a complete guide on day trading cryptocurrency, this article is your best bet!