Using arbitrage strategies to help you day trading cryptocurrency
The cryptocurrency markets are incredibly volatile with huge spikes and troughs each and every day. Many day trading cryptocurrency traders out there have cottoned on to this and started profiting from these ever-moving markets.
By reading the charts, looking at volume, consumer consensus, market news and trends many day traders have made huge profits each and every day.
By using the difference in prices on numerous cryptocurrency exchanges you can allow yourself some breathing space so that if the trade goes against you it won’t be so bad. And if the trade goes to the positive then you’ve just multiplied the benefits before you’ve begun!
But what if you could have a head start on every other trader in the marketplace?
What if you could actually start your day trading cryptocurrency in a winning position before you’d even hit the buy button?
This is where the ‘crypto arbitrage day trading strategy’ comes into play…
First, let’s look at what day trading actually is…
Crypto Day Trading Definition
Day trading cryptocurrency is a short-term strategy that profits from small moves in the market.
When done consistently it may amount to incredibly large profits.
It enables traders to trade often and also profit from micro-trends, instead of being affected by downturns in the market or long periods of inactivity…
A day trader by definition is someone who enters and exits their position in the market on the same day.
A short-term trader that is trading cryptocurrency will form an opinion of where they think a particular cryptocurrency is heading – up or down.
They will have a profit target in mind and will endeavor to exit the trade within the very same day – sometimes even the very same minute!!!
It does not matter if the markets are going up, down or trending sideways to place short-term profitable trades.
In fact, one of the most effective day trading strategies is when a trading instrument (be it currency, stock, CFD, crypto etc.) is stuck in the sideways trend, repeatedly bouncing from support to resistance lines.
For example, if Ethereum continually bounced between $1000 and $1100 then many day traders would look to buy in just above the support line (in this case $1000) and sell before it hits resistance (in this case $1100).
With higher volume and volatility this may happen over the course of minutes or may actually take more than one day. Either way, the trader is not looking at the macro trend but instead profiting from the micro-trend – or put simply, what the instrument is doing in the short term. Whether the trader thinks Ethereum is worth $10,000 or $10 is irrelevant because their long-term view isn’t important for such a short-term trade.
A sample trade that a day trader may make in the above example is they may purchase Ethereum at $1020 and have an exit price of $1070.
If one Ethereum token was purchased then this would amount to a $50 profit or roughly 5% of the trade. Considering most fund managers would consider a 10% profit for the year to be a good one, I’d say 5% over the course of an hour or two is fantastic!
Crypto arbitrage exploits the price differences between the same currency on at least two different cryptocurrency exchanges.
Because each exchange dictates their own price and isn’t governed by any one body there are always price differentials to be seen on the very same instrument /currency.
By purchasing tokens on one exchange for a low price then immediately transferring it over to another exchange that is trading the same token at a higher price. You can basically just buy low, transfer and then sell at the higher price without even waiting for the tokens price to move.
The trend or direction of the market is irrelevant. This allows you to profit when the market is going up, down or sideways.
Day trading arbitrage takes out the need to worry about which is the best cryptocurrency to invest in. It takes out the stress of if the cryptocurrency is going up or down when you purchase. The only things you need to worry about when trading cryptocurrency are things like fees, transfer times, volume and a few other important things you can see here.
Cryptocurrencies are available to trade on many different exchanges with each exchange setting their own buy and sell prices.
Cryptocurrency arbitrage is exploiting the difference between two or more exchanges to make a profit on the same instrument.
For example Coinbase has Bitcoin’s last traded price as $10,000 and Livecoin has the last traded price as $11,000. The simplest arbitrage strategy would be to purchase one Bitcoin (or a fraction of one) on Coinbase. Then transfer it to Livecoin and sell it for an instant profit – that’s the theory anyway.
This example would mean you would purchase for $10,000 and sell for $11,000.
If you didn’t include fees or losses during transfer time then this would equate to a $1,000 profit.
Unfortunately not all tokens or exchanges have instant transfer times so you may get caught out if the market reverses on you. This is where the cryptocurrency arbitrage day trading strategy comes into play…
What is the cryptocurrency arbitrage
day trading strategy?
Placing a trade to profit is one thing but what if you could place the trade already in profit?
What if I told you it’s possible and it’s legal!!!
If you are about to open a position then you obviously have an opinion on which way the market is going to go. If you are opening the position with the view the stock will rise it is much easier to purchase the stock on an exchange that is selling it at the lowest price then instead of sitting and waiting for it to increase – as not many markets will ever rise or fall evenly – you can use an arbitrage strategy to increase your chances of profit and mitigate your risks.
To use the Ethereum day trading example seen earlier, when the opening position was $1020 and the exit price was $1070 – for a $50 profit.
That’s a high probability trade if it has been bouncing between support and resistance on the daily charts. So the chance of you exiting with a profit is good.
But what if you could open your order on one exchange at $1020 and another exchange had the last traded price as $1070?
Instead of waiting what could be minutes, hours, days or not at all you have the opportunity to purchase on one exchange at $1020 and instantly transfer it to another exchange at $1070 (that’s the exact same stock, all you had to do was switch exchanges to increase its value).
1. If the stock does nothing you lock in the same profit without the wait.
2. If the stock goes against you then you still have a fair chance of staying in profit (unless it drops dramatically, in that case you would have had a worse loss if sticking to one exchange)
3. If the stock does what your research suggested and increased while you were waiting for the transfer then your profits are multiplied!!!
Lets look at those scenarios in dollar terms:
2. If the stock goes against you $50
Open Coinspot @ $1020
Transfer to Exmo where price was $1070 at time of trade but price falls while in transit by $50
This means you sell at same price $1020
= $0 profit (less fees, so small loss will be incurred)
Compared to normal day trade where $50 loss is incurred on trade alone
3. If the stock goes up $50
Open Coinspot @ $1020
Transfer to Exmo where price was $1070 at time of trade but price rises while in transit by $50
This means you sell at price with double the profits of a normal day trade on one exchange $1120
= $100 profit (less fees)
Compared to normal day trade where only $50 profit is made