Ask any intraday trader what it is they like about day trading and you might hear the words volatility. Volatility is defined as the tendency for the price of an asset to rapidly change. In other words, volatility merely measures the rate at which an asset’s price changes.
What this means is that when the price of a stock rises or falls from $100 by $10, that is a rise or fall or 10%. Keep measuring this over a period of time and you get the volatility for the stock or the instrument.
To make a decent profit by day trading or speculating on financial instruments, be it currencies or stocks or futures, volatility is crucial. When there is no volatility, the price of the asset barely changes. This means that there are no trading opportunities for day traders.
Among the many different financial assets available for day traders in this day and age, cryptocurrencies have managed to create a niche for themselves. Whether it is Bitcoin, or Ethereum or even Dogecoin, these crypto currencies are famous for their volatility.
Thus, as you can see where this is heading, crypto currencies or cryptos for short make for a very good financial trading instrument for speculative day trading.
One should remember however that when day trading you don’t actually own the underlying instrument. Rather, you are merely speculating or betting on which way the financial instrument will move. If you are right, you get rewarded for it and if you are wrong, well, you lose money.
What makes cryptocurrency day trading to special?
News about cryptocurrencies tend to make it with a big splash on major financial news networks. At the same rate, they also tend to disappear with a bang.
If one can jog their memory, back in mid-December 2020 and by early January 2021, Bitcoin touched $20,000.
It was all over the news, from the BBC to CNBC and Bloomberg. But following that, interest in Cryptocurrencies in general started to fade. The google trends chart shows the interest in the cryptocurrency during the period.
Google Trends for “bitcoin” from 2017 – 2020
One can clearly see how the interest fluctuated between January and February and then gradually started to fall by April.
The trends chart shows that currently interest in cryptocurrencies, or Bitcoin in general is back at its high. The projected dots show rising interest in the crypto currency once again.
Unless one has been living under a rock, it comes as a no surprise. Just around the month of May, cryptocurrencies started to make a comeback.
This was evident from the fact when BTC hit a new all-time high of $60,000. Of course, the fact that BTC then dropped in value by over 30% is a different story all together. But having said that, more and more people are now getting on board.
And by people, I specifically refer to the retail crowd.
Interest in Bitcoin continues to rise and fall. It is the big positive and negative news that springs the cryptocurrencies back to life on the mainstream media. But once the interest dies out, the news topics fade away.
What’s different this time? More institutional acceptance
Institutions have been actively getting into the crypto market. Starting with the more obvious Elon Musk and Tesla, many mainstream financial institutions have also thrown in the towel just after years of resisting the change.
Take for example JP Morgan and its CEO Jamie Dimon.
Dimon was one of the biggest opponents to cryptocurrencies. In fact, in September 2017, Mr. Dimon famously called bitcoin a fraud, saying that it (bitcoin) was not a real thing and that it will be eventually closed.
Fast forward to current day and JP Morgan announced in April that it was allowing clients to invest in Bitcoin funds. Sure, Mr. Dimon still maintains that he is still not interested in cryptocurrencies.
But if the customers are right, who knows?
One of the advantages for cryptocurrency day traders is the fact that with institutional interest is steadily rising. This is good for the instrument’s volatility.
All it takes is for one big news item to pop up and boom, we have another shot of strong volatility, be it Bitcoin or Ethereum or anything else.
Day trading with cryptocurrencies
Be forewarned that day trading with cryptocurrencies is risky. Unless you have a certain level of risk tolerance, this is not your cup of tea. And if you think your experience with trading currencies or stocks helps, think again.
Have you ever come across a (financial) asset that has a 30-day volatility of 5% or higher?
Bitcoin Volatility Chart
The 30-day estimate for Bitcoin volatility is about 5.85%.
Comparing this to the S&P500 Index, the 30-day historical volatility is just about 1.4% as seen in the chart below.
S&P500 index volatility chart
Translating this to you as a day trader, you are better off trading with Bitcoin for example rather than the S&P500 index.
Is it as simple as buying low and selling high?
That’s the trick. Although it sounds simple the concept of buying low and selling high isn’t as obvious as it sounds. If you have day traded any financial instrument, you will know that a low isn’t always the low you are looking for. And likewise, a high won’t be the high that you thought it would.
Day traders have given this phenomenon different names, from stop hunting to they are out to get us. But the truth is that you need to have some really good trading experience under your kitty. While there are many ways to bell the cat, day trading can also be approached from different angles.
Among these, one unique way to analyze the cryptocurrency market for day trading is to look at using Renko charts. Renko chart is a lesser known (which is better for us) way to technically analyze the markets.
After all, when day trading, you don’t really need to know the fundamentals. All you need is volatility, a good trading strategy and a charting platform that allows you to do all that.
What’s unique about renko bricks is the fact that it allows you to view the trends in the markets easily. The general charting techniques can get confusing and also adds a lot of noise.
Below chart shows Bitcoin using the Renko chart type method.
Example of the Bitcoin renko chart
Whether you like it or whether you don’t cryptocurrencies are here to say.
And I believe no one in their right mind can predict where their prices will end up in the futures. So the next time you hear some bigwig trying to predict price of crypto currencies, take it with a pinch of salt.
Day trading with cryptocurrencies offers you a great way to speculate on the volatility. While not giving you a chance to own the underlying asset, this is a great way for day traders to get in on some wild action.
But as we conclude this article, remember that day trading or speculating in financial instruments including cryptocurrencies is risky. While you can use Renko charts to get a different perspective of the markets, remember that it is still risky at the end of the day.
It doesn’t matter that you come with past day trading experience. Volatility in cryptocurrencies can be overwhelming. And as a result, you need to be very careful when speculating on such instruments.
Good luck and always use a demo or paper trading account to practice your day trading strategies.