Why day trading might not be a good idea, after all
It does not matter whether a trader is new to cryptocurrency or has been around for a while. Chances are that day trading still hasn’t lost its appeal in his eyes. He is imagining himself easily making 5-10% of the initial investment every day, or at least doubling it every month. While it is possible to earn money by day trading, it can be a trap for novices. Here are 5 reasons why you should avoid this risky activity.
Traders are are likely to fail because of the FOMO
When day trading, traders are forced to spend lots of time looking at the price graphs. This can lead to different unwanted consequences. One of them is that the trader gets stressed and starts to base his decisions on emotions, not the strategy and/or indicators. The trader buys in when he sees an upward momentum and sells immediately when price starts to fall at an accelerating rate.
Such a style of trading might work for a while, but be ready for everything to go horribly wrong horribly fast: just because the price increases right now, it does not mean that it will continue to increase; the same applies to the fall in price.
Here is a great video that explains how FOMO works:
Decision making time is extremely small
Because trade time is short, one has to be quick when making decisions. The trader often has just a few minutes to analyze the readings of the indicators (assuming he/she uses them) and make an important decision. If he pulls the trigger too early, he loses some of the potential profit. Too late – and he loses some of the initial sum.
The situation is made worse yet by human’s primal instincts, which often force novice traders to go against the logic or strategy. “Weak hands” trading is the quickest and surest way to lose money. Once you create a strategy, stick to it!
However, it is much easier said than done. In stressful situations, you are likely to make an incorrect decision. The pressure is immense when you only have a few minutes to decide.
Market is unpredictable over a short timescale
It is no secret that any cryptocurrency market can be easily manipulated by the whales. Large players have an opportunity to build large-scale pump and dump schemes, making many traders believe that a legitimate major price movement is happening.
Although it is possible to make profit from such moves by, for example, buying in at the beginning of the pump, chances are that the dump will happen before you sell. Because pumps cannot really be predicted, trying to make profit from them is akin to playing a Russian roulette.
On the other hand, if you try to ignore the pumps and dumps when day trading, there is an extremely big chance that one will happen during one of your trades, possibly making you lose some of your money.
Here is an example. On November 14, 2018, the price of Bitcoin dropped more than 6% during just one hour! Take a look at this graph (highlighted region is that hour):
Fees are too high
When the time intervals between opening and closing short position are weeks or even months long, price can change dramatically, allowing the trade to be profitable even with the fees subtracted.
However, over short intervals of time (a few hours or days long), the price tends to remain stable. That means that the fees are often higher than the price difference, rendering the trade unprofitable.
Of course, some exchanges have pretty low fees (check out our list of the best exchanges in 2019). Unfortunately, in most cases, a trader would need at least 1% or even bigger price difference to make your trade profitable.
Even though such a change is not big for the longer time periods (at least a day), it is not guaranteed that it will happen during the hours one trades.
Daytrading is stressful
It is hard for a human being to remain calm when he is forced to watch every price movement a certain cryptocurrency makes on a daily basis. It is frustrating for anyone to accept defeat and exit the trade on negative profit in order to limit losses.
The buildup of the negative emotions makes trader feel nervous, which usually leads to impulsive, irrational decisions. Day trading is for those with strong mental health only.
If you want to profit, you have to be cold-blooded. However, day trading will make you anything but.
Frequently asked questions
Is day trading illegal?
Absolutely not! If the exchange you use is regulatory compliant in your country, then day trading is perfectly legal.
Is day trading worth it?
Depends on your goal. However, as you can read in this story, there are many disadvantages to day trading.
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