Day Trading Cryptocurrency Strategy (Backtest)

Last Updated on September 7, 2022 by Oddmund Groette

Day trading in the cryptocurrency market can offer a lot of profit potential. However, before deciding to day trade cryptocurrencies, you ought to have developed a workable day trading strategy that will help you make consistent profits. So, what is a day trading cryptocurrency strategy?

Day trading cryptocurrency strategy is a method of trading cryptocurrencies where trades are opened and closed within the same day — that is, trades are not rolled over to the next day. It aims to exploit the inevitable up-and-down price movements that occur each day in the crypto market while avoiding unnecessary rollover fees where possible.

In this post, you will be exposed to the concept of day trading and how it applies to the crypto market.

What is day trading?

Day trading is a trading strategy where trades are open and closed within a trading day — that is, trades are not rolled over to the next day. It aims to exploit the inevitable up-and-down price movements that occur each day in the crypto market while avoiding unnecessary rollover fees where possible. This strategy can offer a lot of profit potential since the intraday volatility in crypto assets is sufficient to give a reasonable amount of profit in a day.

In general, day traders spend a lot of time analyzing the market by using technical indicators and pattern recognition to open and close trades. Day traders use different timeframes for analyses. For example, one can use the hourly timeframe to identify the trend of the day and use the 15-min timeframe to enter and exit trades. However, there is no definite rule — the choice of timeframe is solely dependent on your trading personality and your trading plan.

Day trading is considered risky and may not be suitable for beginners due to the volatile nature of the market. However, this is not to say that you can’t day trade. If you are ready to put in the work and sacrifice then you may be on your way to profitability, as day trading offers more trading opportunities than longer-term trading.

To understand how day trading offers more trading opportunities, study these two charts of Bitcoin in different timeframes.

Day trading cryptocurrencies strategy (timeframes)
Day trading cryptocurrencies strategy (timeframes)

Looking at the daily chart above, we can come to two conclusions: First, there was a smooth rally from mid-2020 until somewhere around July 2021. As a buy-and-hold investor, that must have some sweet profits. But a look at the situation from mid-2021 to date, we see a different situation. If you had invested in Bitcoin earlier this year, you must be biting your pillow by now. Bitcoin has been in a downtrend since the beginning of the year.

Now, take a look at the 15-minute chart below:

Day trading cryptocurrencies strategy (example)
Day trading cryptocurrencies strategy (example)

Even though only a limited period is shown on the chart, we can see so many price swings, which present lots of trading opportunities. If you were to trade Bitcoin based on the daily bar, you will have a limited number of trading opportunities compared to what you get from an intraday timeframe. If you are a trader who loves to get every ounce of profits from the market, then trading intraday price fluctuations is your best friend. Although we are not discrediting medium-term and long-term traders, we are simply pointing out the opportunities that can be found in day trading.

Admittedly, the daily timeframe produces a bigger profit size per trade than intraday timeframes. However, with a greater number of trades in the intraday timeframe, you have more compounding opportunities, which makes the overall profits from intraday trading much bigger than what can be gotten trading off the daily timeframe. Moreover, intraday traders can use tighter stops, which allows them to use bigger leverage to increase their profit potential. Thus, for any given win rate and reward/risk ratio, the higher volume of trades offered by intraday trading makes it more lucrative than longer-term trading.

On the flip side, day trading is time consuming. Since the volume of trades is more than a swing and position trader, day traders spend most of their time on screen. Even with trading algos, day trading requires more monitoring than position or swing trading. So, before you choose this path, you must learn the psychology of day trading.

Which timeframe is best for day trading cryptocurrency?

This is a subject of debate in the day trading community. In other not to pass a verdict, we will look at some important points on the matter of timeframe.

Frequency of trades

When you are trading a lower timeframe like the 5-min and 30-min timeframe, the number of trades you open will vary significantly, provided you do not open more than one trade per bar on any asset. Some traders might be inclined to be in and out of trades frequently while others simply would settle for less frequent intraday trades. This might not sound like much until we consider the next point.

Transaction fees

The more trades you make, the more you pay transaction fees. If you are to open and close 20 trades in under an hour, then you will be paying more to your broker in trading fees. If the profits per trade are not big enough to more than cover the trading fees, you are literarily shooting yourself at the foot trading that timeframe.

Also, note that spreads vary across different brokers and exchanges and may eat into your trades if you get on the wrong side of the market.

Risk to Reward

Trading a lower timeframe might force you to have a very poor reward/risk ratio. It is common to see traders trading the 5-min timeframes with tight profit targets and loose stops. The problem with this kind of risk management is that when the market triggers the stop, one loss may wipe out the gains from more than 10 or 20 profitable trades.

Moreover, support and resistance levels are not as efficient in a lower timeframe as they are in a higher timeframe like the hourly timeframes.

A good rule of thumb here is to incorporate multiple timeframe analyses. For example, using a 15-min timeframe together with the hourly and daily timeframes. That is, you use the daily timeframe to understand the price structure and identify key levels; use the hourly timeframe to find the trend for the day and look for trading opportunities at key levels; and finally use the 15-minute timeframe to fine-tune your trade entries and exits.

Which crypto is best for day trading?

There are over a thousand crypto tokens available to day traders. However, the list can overwhelm you when deciding on what to trade. In our opinion, large and mid-cap coins tend to be more stable than small-cap coins. And these small-cap coins suffer a lot of intraday price swings which may not be ideal for day trading. Bitcoin, Ethereum, BNB, ADA, ETC, and XRP are quite stable for day trading.

The reason behind choosing an asset with a stable price is to avoid triggering your stops too often. Also, the crypto market is unregulated and is prone to market manipulation, such as pump and dump, wash trading, and several other forms of illegal market participation. Trading smaller coins may expose you to some of these manipulations.

Day trading cryptocurrencies strategy
Day trading cryptocurrencies strategy. 30-min chart of Bitcoin.
Day trading cryptocurrencies strategy
Day trading cryptocurrencies strategy. 30-min chart of LINA.

From the charts above, you can see that price action was a bit less volatile in Bitcoin (the first chart) compared to LINA (the second chart). You can see the spikes of some of the bars; trading in such a market will subject you to using wide stops which might not look good from a risk-to-reward standpoint.

Which is the best indicator for crypto day trading?

The best indicators are the ones you have back-tested to confirm that they work for your strategy. Having said that, the most common indicators in day trading cryptos are trend-following indicators and oscillators. Let’s take a look at some of them.

Moving Averages (MA)

Moving averages are one of the most popular technical indicators in the market. It is a trend-following indicator. This indicator can be used in several ways.

Day trading cryptocurrencies strategy (moving average)
Day trading cryptocurrencies strategy (moving average). 20-period MA on the 15-min chart of Bitcoin.

One of the basic strategies for the moving average is to buy when the price is above the indicator line and sell when the price is below it. As you can see on the above chart, when the price is rising, it is always above the indicator. In the same fashion, downward momentum is seen whenever the price falls below the indicator and keeps moving down. Note that this is a trend-following indicator and, as such, may not work well in a ranging market.

Bollinger Bands (BB)

Just like the MA, the Bollinger band is quite useful to follow the trend while also measuring the volatility of an asset.

Day trading cryptocurrencies strategy (Bollinger Bands).
Day trading cryptocurrencies strategy (Bollinger Bands). 20-period Bollinger Bands applied to 30-min chart of Bitcoin.

Buy signals are generated whenever prices ascend after breaking below the lower band. The opposite is true of a sell trade.

Relative Strength Index (RSI)

The RSI is a popular momentum oscillator used by traders to measure extremes in the market.

Day trading cryptocurrencies strategy (RSI indicator)
Day trading cryptocurrencies strategy (RSI indicator). 20-period RSI on 15-min chart of Bitcoin.

The basic rule of trading the RSI is to buy whenever prices are oversold (below 30) and sell when it is overbought (above 70).

Final words

None of the indicators should be used in isolation. Indicators work best when you combine a few to create a strategy you can quantify. Make sure you back-test and forward-test your strategy to be sure it is profitable before trading.

We have also published other crypto strategies in our Bitcoin and Crypto Guide. You might also like our article about cryptocurrency trading strategy.

Day trading cryptocurrency strategy (backtest and example)

A backtest of a day trading cryptocurrency strategy is coming soon.

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