Trading in the volatile world of cryptocurrency necessitates a structured approach and well-planned strategy. Since cryptocurrencies typically have a low correlation to economic fundamental data and other markets, technical analysis and crypto-specific news remain the main drivers for analyzing cryptos.
Most analysts would agree that there is no “perfect” trading strategy. However, there are many methods that are well suited to those interested in trading cryptocurrencies. You simply need to pick out the strategy best suited for the market direction and your trading style.
Today we will be covering crypto trading strategy based on the combination of the Stochastic indicator and Parabolic SAR indicator.
Understanding Stochastic indicator
Stochastic is a leading indicator as it gives us advanced signals before it is reflected in the price behavior. Stochastic is a two-line indicator that oscillates between 0 and 100. If the value crosses 80, it is considered an Overbought zone, and any value below 20 is considered an Oversold zone.
Stochastic – Components
The two lines of the indicator are labeled %K (blue color) and %D (orange color). The K line is faster than the D line; the D line is the slower of the two.
The stochastic indicator provides information about momentum and trend strength. The indicator analyzes price movements and tells us how fast and how strong the price moves.
The indicator shows the position of the most recent price compared to the highest and lowest price of the crypto over a period of time (usually 14 days).
This means that when the value of the indicator is near 0 (Zero), the price is trading near or below the lowest low during the 14-day period. Similarly, when the value is near 100, the price is trading near or above the highest high during the 14-day period.
Understanding Parabolic SAR indicator
Parabolic SAR is short for parabolic Stop And Reverse. This indicator follows the price and shows the point where the trend reverses. It may be noted that Parabolic SAR is best used when the market is trending. If the market is choppy, the market is moving sideways, this indicator does not work at its best.
When graphically plotted on a chart, the Parabolic SAR indicator is displayed as a series of dots.
Parabolic SAR – Bullish and Bearish
- Bullish signal: When the dots appear below the price bar, the parabolic SAR is interpreted as a bullish signal. The momentum is expected to remain in the upward direction.
- Bearish signal: When the dots are positioned above the price bar, it is deemed to be a bearish signal. The momentum is expected to remain in the downward direction.
- Trend Reversal: When the change occurs (i.e., the dot goes from below to above the next candle, or vice versa), this indicates a potential price reversal may be happening.
Crypto trading strategy based on Stochastic and Parabolic SAR
Today’s crypto trading strategy focuses on using the Parabolic SAR and Stochastic for accurate entry and exit.
Buying Rules
The buy signal is generated when Stochastic is at the oversold zone and the %K intersects the %D from beneath and moves above it, while the dots at the Parabolic SAR stop appearing above the price bars and are now visible below them.
Buy Signal using Parabolic SAR and Stochastic
As you can see from the chart of BTCUSD, the crypto started moving higher once the buy criteria were fulfilled. Some traders prefer to keep tight stop loss and will get out of the trade when the dot appears above the price candle.
Selling Rules
A sell signal is generated when Stochastic is at the overbought zone and the %K intersects the %D from above and moves below it, while the dots at the Parabolic SAR stop appearing below the price bars and are now developing over them.
Sell Signal using Parabolic SAR and Stochastic
As you can see from the chart of ETHUSD, the crypto started moving lower once the sell criteria were fulfilled. Some traders prefer to keep tight stop loss and will get out of the trade when the dot appears below the price candle.
As you can see, the crypto trading strategy based on Parabolic SAR and Stochastic can help you identify profitable trade setups and help in avoiding false signals.
Happy trading!
Trades of the Day Research Team