Speculative Short Term Crypto Trading Strategy

03/09/2021

Some traders thrive on the thrill of short-term trading adventures, or speculative trading. Others prefer to invest long term, sit back, relax, have nights of peaceful sleep, and let the markets do their thing. That being said, there’s ample fan following for short-term strategies. Although the basics of short-term trading are similar across different assets, crypto trading requires you to consider some additional steps to stack the odds in your favor.

Short-term trading can also be called aggressive trading. Why? Because you’re taking more risk in the hope of making more profit. Investment of any kind requires a constant balancing and trade-off between risk and return. To earn more return, you must take more risk. When aiming to make money in the short term, you must be prepared to lose your investment (and maybe even more!) in that time frame as well, especially in a volatile market like cryptocurrencies.

Short-term trading can be divided into different categories within itself based on how quickly you realize the profits — hours, days, or weeks. Generally speaking, the shorter the trading time frame, the higher the risk involved with that trade. The following spell out the three most common short-term trading time frames for cryptocurrencies.

Profiting within hours

Day trading is one form of aggressive short-term trading. You aim to buy and sell cryptos within a day and take profit before you go to bed. In traditional markets like the stock market, a trading day often ends at 4:30 p.m. local time. But the cryptocurrency market runs 24/7, so you can define your day-trading hours to fit your schedule. Here are a few questions to ask yourself to determine whether day trading is indeed the right crypto route for you:

  • Do you have the time to dedicate to day trading? If you have a full-time job and can’t stick to your screen all day, day trading probably isn’t right for you. Make sure you don’t use your company time for trading! Not only you can get fired, but you also won’t be able to dedicate the required time and energy to trading either. Double the trouble.
  • Do you have sufficient risk tolerance for day trading?
  • Even if you can financially afford to potentially lose money day trading, are you willing to do so? Do you have the stomach to see your portfolio go up and down on a daily basis? If not, perhaps day trading isn’t right for you.
  • If you’ve made up your mind that day trading is the right crypto route for you, the following share some tips to keep in mind before getting started.

    Define crypto trading sessions

    Because cryptocurrencies are traded internationally without borders, one way you can define a trading day is to go by the trading sessions in financial capitals of the world like New York, Tokyo, the Eurozone and Australia. This method follows similar trading sessions as in the foreign exchange (forex) market. Some sessions may provide better trading opportunities if the cryptocurrency you’re planning to trade has higher volume or volatility in that time frame. For example, a cryptocurrency based in China, such as NEO, may see more trading volume during the Asian session.

    Know that day trading cryptos is different from day trading other assets

    When day trading traditional financial assets such as stocks or forex, you can follow already established fundamental market-movers such as a company’s upcoming earnings report or a country’s interest rate decision. The cryptocurrency market, for the most part, doesn’t have a developed risk-event calendar. That’s why conducting fundamental analysis to develop a day-trading strategy is way harder for cryptos.

    Set a time aside

    Depending on your personal schedule, you may want to consider scheduling a specific time of the day to focus on your trades. The idea of being able to trade around the clock is pretty cool in theory. You can just get on your trading app during a sleepless night and start trading. But this flexibility can backfire when you start losing sleep over it. Remaining alert during day trading, or night trading for that matter, is very important because you need to develop strategies, identify trading opportunities, and manage your risk multiple times throughout the trading session. For many people, having a concrete discipline pays off.

    Start small

    Day trading involves a lot of risk. So until you get the hang of it, start with a small amount and gradually increase your capital as you gain experience. Some brokers even let you start trading with a minimum of $50.

    If you start trading small, make sure you aren’t using margin or leverage to increase your trading power. Leverage is one of those incredibly risky tools that’s projected as an opportunity. It lets you manage a bigger account with a small initial investment by borrowing the rest from your broker. If you’re trying to test the waters by starting small, using leverage will defeat that purpose.

    Don’t take too much risk

    Most successful day traders don’t stake much of their account — 2 percent of it, max — with each trade. If you have a $10,000 trading account and are willing to risk 1 percent of your capital on each trade, your maximum loss per trade is $100 (0.01 × $10,000). So you must make sure you have that money set aside for potential losses, and that you aren’t taking more risk than you can afford.

    Secure your crypto wallet

    One major problem with day trading cryptocurrencies is securing your crypto wallet. The least secure cryptocurrency wallets are online wallets. Because you’re going to need your capital handy throughout the trading day, you may have no choice but to leave your assets on your exchange’s online wallet, which can expose you to risk of hacking.

    One way to enhance your security here is to not actually buy and sell cryptocurrencies but rather to speculate the price action and crypto market movements by using brokers who facilitate such services.

    Stay away from scalping

    Scalping is the shortest-term trading strategy some individual traders choose. It basically means jumping in and out of trades frequently, sometimes in a matter of seconds. If you’re paying commission fees for every trade, not only are you exposing yourself to a ton of market risk when scalping, but you can also get burned out by the fees before you make any profit. Individual traders rarely make any profit scalping. Now, if you’re part of an enterprise that has access to discount commission fees and huge trading accounts, the story may be different.

    Profiting within days

    If you want to trade short term but don’t want to stick to your computer all the time, this time frame may be the right one for you. In traditional trading, traders who hold their positions overnight are categorized as swing traders. The most common trading strategy for swing traders is range trading, where instead of riding up a trend, you look for a crypto whose price has been bouncing up and down within two prices. The idea is to buy at the bottom of the range and sell at the top. If you’re using a broker who facilitates short-selling services, you can also go the other direction. To identify a range, you must be proficient in technical analysis. A number of technical chart patterns and indicators can help you identify a range. For more on technical analysis, check this trading guide here.

    If you choose swing trading rather than day trading, one downside is that you may not be able to get an optimized tax rate that’s created for day traders in some countries. In fact, swing trading is in the gray area for taxation because if you hold your positions for more than a year, you also get an optimized tax rate.

    If you’re trading the cryptocurrency market movements without actually buying them, make sure you aren’t paying a ton of commission fees for holding your positions overnight. Consult with your broker before developing your swing-trading strategy

    Profiting within weeks

    This time frame falls into the category of position trading in traditional markets. Still shorter than a long-term investing strategy but longer than day trading, this type of short-term trading can be considered the least risky form of short-term trading. But it’s still risky.

    For this type of trade, you can identify a market trend and ride it up or down until the price hits a resistance or a support. As explained more here, a resistance level is a psychological market barrier that prevents the price from going higher. A support level is the opposite: a price at which the market has difficulty “breaking below.”

    To hold your positions for weeks, you need to keep your crypto assets in your exchange’s online wallet, which may expose you to additional security risk. You may be better off utilizing a broker that provides price-speculation services for this type of trading strategy so you don’t have to own the cryptocurrencies.

    One popular position-trading strategy involves the following steps:

    • Identify a trend (using technical analysis).
    • Wait for a pullback.
    • Buy at the pullback within the uptrend.
    • Take profit (sell) at a resistance.

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