If you’re thinking of trading crypto currencies, you are targeting an instrument that experiences a wide range of conditions. In 2017, crypto currencies experienced extreme volatility as prices surged higher, only to tumble during 2018. The sideways prices action and the recent rally shows that volatility can be subdued. There are several trading strategies that you can use to capture the movements in liquid crypto currencies.
With different market conditions driving volatility, you want to have a strategy that will catch changes in momentum, as well as determine when the market is trending. Additionally, you want to have a strategy that will provide a potential signal that crypto currency is moving sideways and mean reverting.
Trading with Momentum
The chart of bitcoin shows two distinct trading environments during 2019. Prices moved sideways from the beginning of the year until the beginning of April. During the Q2 prices have trended higher. You want to use specific tools to help you trade each of these markets.
One of the best momentum tools for the trade crypto currency is the MACD (moving average convergence divergence) index. This index uses the difference between 2-moving averages to measure momentum. As the difference in the moving averages expands, momentum is rising and when the difference in the moving average contracts, momentum is slowing.
When the index crosses above or below a moving average of the index, a buy and sell signal are created. The default for the MACD index is the 12-day moving average minus the 26-day moving average. This captures medium term momentum. The MACD signal is the 9-day moving average of the MACD index. You can alter the number of increments to anything you want. A short-term momentum indicator could use the 5-day moving average and the 13-day moving average. The signal line could be the 6-day moving average of the MACD line. The green arrows in the chart of bitcoin point to buy crossover signal spots. The red arrows in the chart point to sell crossover signal levels.
You also might consider looking for a trend to be in place. The above chart also shows the 10-day moving average and the 50-day moving average. That can also place signals to show you when a short- term trend is in place. When the 10-day moving average crosses above the 50-day moving average, an uptrend is in place. When the 10-day moving average crosses below the 50-day moving average, a downtrend is in place.
When bitcoin prices are moving sideways you can use mean reversion tools to help you make trading decisions. The goal is to capture the range as prices move from the high end of the range to the low end of the range and back. You can choose to place a ‘Take Profit’ in the middle of the range.
You can use the Bollinger Bands as well as the fast stochastic to measures if the price has moved to an overextended level. The Bollinger bands capture the 2-standard deviation range around the 20-day moving average as the default. The fast stochastic is an oscillator that measures overbought and oversold levels. You can consider buying at the Bollinger low or if the fast stochastic is below 20. You might look for the combination of both. You might sell bitcoin if the price reaches the Bollinger band high or if the fast stochastic is above 80, the oversold trigger level.
Kindly note that all of the analysis presented above is for educational and informational purposes only and should be considered an advice.