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 relative strength index (RSI) indicator and average directional movement index (ADX) indicator.
Understanding the ADX indicator
Average Directional Movement Index comprises of three lines: Minus Directional Indicator (-DI), ADX line, and Plus Directional Indicator (+DI). The ADX indicator calculates on the basis of moving average of price over a given time frame and is used for assessing the strength of a trend.
A crypto’s directional movement is determined by comparing the difference between two consecutive lows with the difference between their respective highs. (+DI) and (-DI) are derived from smoothed averages of these differences and measure trend direction over time.
(+DI) and (-DI) are momentum indicators. (-DI) is the negative directional indicator while (+DI) is the positive directional indicator (+DI).
- When (+DI) is above (-DI), then the trend is considered as an uptrend.
- When (-DI) is above (+DI), then the trend is considered as a downtrend.
- (+DI) crossing over (-DI) signals trend reversal to a bullish trend.
- (-DI) is crossing over (+DI) signals trend reversal to a bearish trend.
ADX itself is the smoothed average of the difference of the (+DI) and (-DI) lines. ADX cannot have a negative value.
- When the value of ADX is <25, it indicates a weak trend
- When the value of ADX is between 25 and 50, it indicates a strong trend
- When the value of ADX is between 50 and 75, it indicates a very strong trend
- When the value of ADX is >75, it indicates an extremely strong trend
Understanding RSI indicator
RSI is short for Relative Strength Index. RSI is a momentum indicator that measures the speed and change of price movements, and can be used to identify trend reversal.
The RSI is calculated using average price gains and losses over a given period of time. The default look-back period for RSI is 14.
RSI value oscillates between 0 and 100. When the RSI value is above 70, it is considered as overbought, and when RSI is below 30, it is considered as oversold. Some traders prefer to use 75/25 or even 80/20 to define overbought and oversold levels.
Crypto trading strategy based on ADX and RSI
Today’s crypto trading strategy focuses on using the RSI indicator in conjunction with the ADX indicator for accurate entry and exit.
The buy signal is generated when the ADX reading is above 25 (A value above 25 on the ADX line indicates a strong trend and a strong probability of a trend continuing), the RSI is moving above 30, and the (+DI) line crosses above the (-DI) line.
As you can see from the chart of BTCUSD, the crypto started moving higher once the buy criteria were fulfilled.
A sell signal is generated when the ADX reading is above 25, the RSI is moving below 70, and the (-DI) line crosses above the (+DI) line.
As you can see from the chart of ETHUSD, the crypto started moving lower once the sell criteria were fulfilled.
As you can see, using the ADX indicator in conjunction with the RSI indicator can help you trade cryptos better, as their combination can help avoid false signals, creating profitable trading.
— Trades of the Day Research Team