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 Aroon indicator and the Moving Average Crossover.
Understanding the Aroon Indicator
The Aroon indicator is a popular trend-based indicator. This indicator helps in identifying trends and also measuring the strength of the trend. Aroon indicator mainly focuses on time in relation to the price of the crypto.
Aroon indicator consists of two Aroon lines – Aroon Up (orange color), and Aroon Down (blue color). Both these lines are measured on a scale from 0 to 100.
Components of Aroon Indicator
Aroon Up and Aroon Down are calculated as the number of days since the last N-period high and low respectively. The default value of ‘N’ is 14 days.
Aroon Indicator – Time Period
- Aroon Up measures the number of days since the price had recorded an ‘N’ day high.
- Aroon Down measures the number of days since the price had recorded an ‘N’ day low
Interpreting Aroon Indicator
- If the Aroon Up is above 70 while Aroon Down is below 30, it signifies a bullish market with newer highs expected for the crypto.
- If the Aroon Up is below 30 while Aroon Up is increasing, it signifies that a bearish sentiment prevails in the market.
Understanding Moving Averages
Moving averages (MA) are one of the most popular and often-used technical indicators. Moving Average indicator smooths out price trends by filtering out the “noise” from short-term price fluctuations, thereby providing a clear price action and crypto direction.
Moving average indicator shows the average value of a crypto’s price over a period (e.g. 10 days, 50 days, 200 days, etc) and is usually plotted along with the closing price. The figure below shows the 50-day and 200-day moving average for BTCUSD.
BTCUSD – Moving Averages
SMA and EMA
There are two types of Moving Averages – Simple Moving Average (SMA) and the Exponential Moving Average (EMA). An SMA is formed by the simple average of closing prices of a crypto over a specific number of days, while an EMA is formed by giving a higher weightage to the recent close prices of the crypto.
Uses of Moving Averages
- Moving Averages can help to identify the trending direction and determine the support and resistance levels.
- MA lines generally act as the support level of the crypto whenever there is a correction during an uptrend, and act as a resistance level in case the crypto bounces upwards during a downtrend.
- Moving Averages form the basis of indicators like Moving Average Convergence Divergence (MACD) and percentage price oscillator (PPO).
Moving Average Crosses
- When two MAs are applied to the crypto chart, and the shorter-term MA crosses above the longer-term MA, it indicates that the trend is shifting up. This is also called a “golden cross.”
- When two MAs are applied to the crypto chart, and the shorter-term MA crosses below the longer-term MA, it indicates that the trend is shifting down. This is also called a “dead/ death cross.”
Crypto trading strategy based on Aroon and Moving Average Cross
Today’s crypto trading strategy focuses on using the Aroon indicator in conjunction with the Moving Average indicators for accurate entry and exit. In this strategy, we will be using the 5-day SMA and 20-day SMA, and using their crossovers (golden cross and death cross) for identifying the buying and selling criteria.
Buying Rules
The buy signal is generated whenever the Aroon Up line is above 50 and is above the Aroon Down line, and the 5-day SMA has crossed above the 20-day SMA.
BTCUSD – Buy Criteria -Aroon and MA Cross
As you can see from the chart of BTCUSD, the crypto started moving higher once the buy criteria were fulfilled.
Selling Rules
A sell signal is generated whenever the Aroon Down line is above 50 and is above the Aroon Up line, and the 5-day SMA has crossed below the 20-day SMA.
ETHUSD – Sell Criteria – Aroon and MA Cross
As you can see from the chart of ETHUSD, the crypto started moving lower once the sell criteria were fulfilled.
Using the Aroon indicator in conjunction with the Moving Average Crosses 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 death cross occurs. Similarly, a trader may exit his short positions if a golden cross occurs.
Happy trading!
Trades of the Day Research Team