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 Fibonacci Retracement and the MACD indicator.
Understanding the MACD Indicator
The MACD indicator measures the relationship between the 26-period Exponential Moving Average (EMA) and the 12-period EMA. MACD is an indicator that follows the trend and is used to give you an idea of how overbought or oversold a market condition exactly is.
The MACD indicator consists of three parts: MACD line (blue color), MACD Signal Line (orange color), and the MACD Histogram. The line at the center is called the zero line.
MACD- Components
MACD Crosses
MACD crosses can confirm a trend change, at least in the short term. MACD crosses indicate a shift in trend momentum, translating to buy or sell signals. There are two types of MACD crosses.
BTCUSD – MACD – Bearish And Bullish Cross
Bullish Cross: When the MACD line crosses above the MACD signal line, it is known as a bullish cross.
Bearish Cross: When the MACD line crosses below the MACD signal line, it is known as a bearish cross.
Understanding the Fibonacci Retracement
Fibonacci retracements are often used as part of a trend-trading strategy. In this strategy, traders assume that a price has a high probability of bouncing from the Fibonacci levels back in the direction of the initial trend.
The key Fibonacci ratios used in the Fibonacci Retracement concepts are 23.6%, 38.2%, 61.8%, and 100%. These ratios usually act as a support or resistance level. In addition to the above-listed ratios, 50%, as well as 78.6% retracement levels are also for identifying support or resistance.
Whenever the price of the crypto retraces to the level of any of these ratios, the previously existing trend typically continues.
The figure below shows how BTCUSD had taken support at its key Fibonacci retracement levels before continuing its upmove. The support taken by the crypto is marked on the chart.
BTCUSD – Fibonacci Levels
Crypto trading strategy based on Fibonacci Retracement and MACD
Today’s crypto trading strategy focuses on using the Fibonacci Retracement in conjunction with the MACD indicator for accurate entry and exit.
Buying Rules
The buy signal is generated whenever the MACD line crosses above the MACD Signal Line, and the current price retraces to key Fibonacci levels.
ADAUSD – Buy Criteria
As you can see from the chart of ADAUSD, the crypto started moving higher once the buy criteria were fulfilled.
Selling Rules
A sell signal is generated whenever the MACD line crosses below the MACD Signal Line, and the current price retraces to key Fibonacci levels.
ETHUSD – Sell Criteria
As you can see from the chart of ETHUSD, the crypto started moving lower once the sell criteria were fulfilled.
Using the Fibonacci Retracement in conjunction with the MACD indicator can help you trade cryptos better. Using the two indicators in tandem can help avoid false signals and create profitable trading.
Many crypto traders choose to close out their position when any one of the indicators signals a shift in momentum. For instance, if a trader has a long position, he may choose to exit the trade if a bearish MACD cross occurs. Similarly, a trader may exit his short positions if a bullish MACD cross occurs.
Happy trading!
Trades of the Day Research Team