Crypto Trading Strategies: Average True Range Indicator and Stochastic

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 Average true range (ATR) Indicator and stochastic indicator.

Understanding the Average true range (ATR) Indicator

The Average true range (ATR) Indicator is a volatility indicator. Volatility does not say anything about the trend strength or the trend direction, it only tells you how much price fluctuates. This means that the indicator can experience extreme highs and lows based on the volatility, independent of price direction.

The ATR indicator represents a 14-period smoothed moving average (SMMA) of the true range values. A crypto with a high level of volatility has a higher ATR, while crypto with lower volatility has a lower ATR. The ATR indicator also has no upper or lower limit bounds like the RSI indicator.

ATR Indicator

The ATR indicator basically measures how much price moves on average. The ATR indicator moves up when the moves in the prices become larger, and the ATR indicator moves down when the moves in the prices become smaller.

The ATR indicator is typically used by traders as a stop loss tool. When the ATR is high, a trader expects wider price movements and sets his stop loss order further away to avoid getting stopped out prematurely. On the other hand, traders use a smaller stop loss when volatility is low. Traders also use the ATR to aim for a larger take profit when volatility is high.

Average True Range Indicator can also be used to predict trend changes and confirm whether the move or breakout is valid. Whenever there are strong moves of the crypto (in either direction), it would be accompanied by a large value of Average True Range, especially at the beginning of the move. On the other hand, false or uninspiring moves are usually accompanied by relatively narrow ranges.

Understanding the 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.

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.

Stochastic Indicator – Components

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).

  • Near 0 (Zero): The price is trading near or below the lowest low during the 14-day period.
  • Near 100: The price is trading near or above the highest high during the 14-day period.
  • Above 50: The price is trading within the upper portion of the 14-day period
  • Below 50: The price is trading in the lower portion of the 14-day period.

Typically, a buy signal is generated when the %K falls below 20, and a sell signal is triggered when the %K rises above 80.

The crossovers that occur in the outer ranges are considered particularly strong signals.

  • Whenever the fast Stochastic %K crosses above the slow Stochastic %D in oversold levels, a bullish signal is generated.
  • Whenever the fast Stochastic %K crosses below the slow Stochastic %D in overbought levels, a bearish signal is generated.

Crypto trading strategy based on Average true range indicator and Stochastic

Today’s crypto trading strategy focuses on using the Average true range indicator in conjunction with the stochastic indicator for accurate entry and exit.

Buying Rules

The buy signal is generated when the %K line of the stochastic crosses above the %D line, Stochastic is above 50 after moving higher from the oversold zone, and the ATR value is low, confirming a ranging market. Traders typically exit the trade when the stochastic moves down from overbought levels and is below 50, and the %K line of the stochastic crosses below the %D line.

Buy Criteria – ATR and Stochastic

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 when the %K line of the stochastic crosses below the %D line, Stochastic is below 50 after moving lower from the overbought zone, and the ATR value is low, confirming a ranging market. Traders typically exit the trade when the stochastic moves higher from oversold levels and is above 50, and the %K line of the stochastic crosses above the %D line.

Sell Criteria – ATR and Stoch

The chart of ETHUSD shows that the crypto started moving lower once the sell criteria were fulfilled.

As you can see, the crypto trading strategy based on the Average true range indicator and Stochastic can help you identify profitable trade setups and help in avoiding false signals.

Happy trading!

— Trades of the Day Research Team

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