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Cryptocurrency Day Trading

Applying standard trading techiques to cryptocurrencies

What I intend to describe here, is an experiment in Cryptocurrency Day Trading, that I am currently running. I have had experience with day trading stocks and bonds, and the principles for trading cryptocurrencies are very similar. I might add here that this really encompasses more than “Day Trading”, since technically day trading means you buy a stock in the morning, and sell it in the evening if the price went up. Some trades require more patience than this. There are some basic common sense rules to follow (and I will describe these before explaining how to find an exchange and transfer currencies, and begin trading):

  1. Buy Low, Sell High
  2. Study the “Technical” Aspects
  3. Study the “Qualitative” Aspects
  4. Patience is a Virtue
  5. Don't Put All Your Eggs in One Basket
  6. Techniques

1. Buy Low, Sell High

The first rule is rather obvious, as it is the goal of any trading scheme, to make a profit. To do this, and do it well, we need to consider rules 2 and 3. If one wades into trading without doing their homework, one can lose everything.

2. Study the "Technical" Aspects

The first thing (and the simplest on most exchanges) is to determine and compare the current prices and trading ranges of various currencies (both Crypto and the more common National currencies). Primarily, you want to determine how a particular cryptocurrency performs in terms of cash value, as well as other cryptocurrencies (or “Cryptos”). This may be difficult for some Cryptos, because exchanges don't always provide cash value graphs for them. Most exchanges will provide trading data of various Cryptos vs BTC (Bitcoin), and this is where I will concentrate most of the discussion.

  • Trading range

You will be able to look at graphs (we'll use Devcoins as an example) for the last 6 hours, 1 day, 1 week, 1 month, and 3 months, and be able to figure out what the “normal” trading range is, as well as see which way the Crypto may be trending, and if there are any cyclic variations in price. One thing to avoid, is basing any trading decisions on anomalies.

  • Volume

Also, the Volume information is important. High volumes indicate a lot of interest and volatility in a Crypto, and make it a good candidate for profitable trading. Later, after you get an account on an exchange, take a look at how all of the Cryptos trade against BTC. You will find some with high volumes and wide trading ranges (DVC is a pretty good example), and some with very low volumes, and flat prices (XPM/PPC as an example, although it's most likely these two Cryptos don't trade against each other much, and that's the reason for the low volume and flat prices)

The following graph shows how DVC have traded for the last 3 months. There's one thing you want to avoid when trading, and that's anomalies. There's a huge one in early December. This is not obviously within the normal trading range, although some further research into what caused it may be of interest in the future.

A one month graph is better for establishing a normal trading range (but remember the graph cannot predict the future).

Notice there's a more defined trading range, and there are two events that may or may not be cyclic. The two events that look like cyclic rises in price (and it's very good to find these, usually) happen on the 24DEC13 and 31DEC13, which are Christmas Eve and New Year's Eve, time when people were off work for a holiday. This is a “clue” to file for future reference. but it appears the price rises when people have extra time (like weekends), which could provide a cyclic event to watch for. Another thing you are looking for is the trading range, the peaks vs the valleys. In this chart (exclude the big hump at the beginning for now, as it may be anomalous) the average trading range seems to be from about 0.000000060 or so, to 0.000000080. This is a good range to make some profit. Notice that there are also some rather high volumes, which makes Devcoin a good candidate for trading against BTC. The next step would be to pick a comfortable set of limits to buy and sell at, and not at the extremes of the trading range. An example of this would be to select 0.000000065BTC as a “Buy level”, and 0.000000075 as a “Sell level” (which works out to a 15% margin, which is actually quite high, as most stock traders are even happy with a 5% margin). So, for instance you would buy 1000 DVC if the price dips below 0.000000065BTC, and then sell them when the price goes above 0.000000075BTC, and you have made a 15% margin (profit). Another thing visible in the graph, is a definite downward trend. This could be bad, or it could be good. If you buy during such a downward trend, and it keeps going down, don't panic. Hold on to the purchase, and if the trend continues for more than a week, park your purchase in your “home” wallet. With a Crypto like Devcoin, that has an active community, the trend may reverse, and your patience will pay off. Which brings us to the next section… The “Non-Technical” aspects…

3. The "Qualitative" Aspects

This is where research into the press, and even blogs and forums becomes important. There are various news outlets, as well as blogs and forums, that can provide information that can signal the short term change in the price of a Crypto (and I'll include a “short list” in the Links” section). The huge success of Bitcoin is due to it's exposure (most of it favorable), and subsequent inclusion of Bitcoin in “mainstream” trading. The fund managers of traditional trading houses can even include Bitcoin investments in traditional stock portfolios and 401k plans. This is what drove the price of 1BTC from about $50.00USD to $1,000.00USD within less than a year. Search for news stories (especially in the Wall Street Journal) for whatever Crypto you are trading. Subscribe to RSS feeds from these publications. Go to blogs and forums that discuss Cryptos, and subscribe to them as well. You may, for instance get a tip-off to a large surge in price for a particular crypto, and trade that Crypto, and make a tidy profit. The things you are looking for are rather obvious. Good press makes the price go up, and bad press makes the price go down.

The second “Qualitative” thing to research, is the background of the Crypto. This may take a bit of digging. It's important, because you don't want to buy into a Crypto, only to learn it was invented on a whim, in an effort to make a quick buck, only to find you're left holding the whole bag of coins when the music stops. Somebody else sold them all to you for all the BTC you had, and now they're not worth the space the blockchain takes up on your hard disk…… This happens, and with the increased popularity of Cryptos, it will happen more often. Find out what “makes it tick”. I'm not going to name any Cryptos here that I think are frivolous, but I probably could “copy-paste” the source code from something like Litecoin, rename it “Jedcoin”, and come up with a bunch of hype that would get some poor schmuck to buy them up as they're mined. As always, Buyer Beware” is something to keep in mind when trading Cryptos.

In these two points, trading Cryptos is very much like trading stocks, and “due diligence” will prove very useful.

4. Patience is a Virtue

When you decide to buy a particular Crypto, don't expect to make a profit from the trade right away. There are two prices you will see on an exchange. The “Ask” price is what you will use when you buy a Crypto, and the “Bid” price is what you will use when you sell a Crypto. You will notice that the two prices are often very far apart, but occasionally fairly close. These prices are somewhat related to the current trading range (usually within the last few hours). On the exchange, you can also look at a recent trade history. Is everybody selling? This drives the price down. Is everybody buying? This drives the price up. Is there a lot of activity with both buying and selling? This could be the kind of activity that means, if you play it right, might get you a few margin points quickly. Keep in mind that the Bid price is usually lower than the Ask price. You want to wait to sell until the Bid price is above the Ask price you paid for the Crypto. Sometimes this may take hours if there's a lot of volume in both directions (buying and selling), or it may take days, weeks or months. Keep an eye on the market, and watch for opportunities.

5. Don't Put All Your Eggs in One Basket

Hedge your bets. Try looking at more than one Crypto. One may be on a downward trend, but another may be on an upward trend at the same time. What I did was put a portion of the 0.01BTC I had on the exchange that I'm using, and only used a small portion of that amount to buy Devcoin. The idea is that there is plenty left over for trying the same techniques with other Cryptos, and still a reserve in the “home” wallet. The more different Cryptos you study for trading purposes, the more opportunities you will see.

6. Techniques

You can day trade, if there is enough volume and volatility within a day (or a few days). This is a straightforward method, but it requires watching the ASK and BID prices very closely. You can also set a goal within the trading range, and issue a sell order. If the Crypto you are trading goes above the price you set in the sell order, the sale is made, and you get a profit. Day traders cancel any trades that have not gone through within a fixed period of time, from a day to a week. Of course this incurs fees, which is a good reason to “park” some of your funds in your wallet on your home machine.

When you place a sell order, those funds are tied up in that trade. If you are patient, you can do long term trades. If you know the Crypto you are trading has the potential to go above the normal trading range, you can place a sell order at whatever price you choose. If that Crypto is in a constant downward trend (as Devcoin seems to be at the moment), you may have to wait a while. You can set yourself a time limit to cancel your order such as a month, and cancel it a month later if it doesn't sell. You can also place buy orders at a target bargain price, and wait until the price drops low enough that the sale goes through (then immediately place a sell order at a target higher price, of course).

What You Will Need

You will need to install wallets for whatever Cryptos you intend to receive payments in. If you intend on doing long term trades, install wallets for any Cryptos you intend to “park” for a month or more.

You will need an account on an exchange. A list of a few exchanges will be included in the Links section.

You will need some Cryptos to start with. There are faucets and other websites that allow you to earn Cryptos. They don't pay much, but the little they do pay are useful for covering Transaction Fees on the exchanges. You can buy BTC with PayPal or a credit card, but be careful where you buy them. Since I “piddled around” with various ways of earning BTC (such as watching advertisements, rating Google searches, etc…) I had 0.01BTC to play with, but these are very time consuming. Since BTC are becoming somewhat of a “mainstream” currency, you might ask your bank if you can buy BTC through them (their transaction fees may be as high as 10% or more). There are also BTC gift cards (if what i've read is correct ) on Amazon redeemable in BTC. At the time of this writing, $25.00USD will get you about 0.03BTC.

Bitcoin Litecoin Devcoin Dogecoin

This list is not meant to be exhaustive…. If there's another Crypto you want, Google is your friend….

News Sources

Bitcoin News When doing a search for news sources, there's a lot of “noise”. It may take a while to sort some of these out.

BitCoinTalk has forums on ALL the Cryptos, and is a good source for info on all Cryptos.

Coindesk.com

Cryptocurrency Investing Trading


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