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 Awesome Oscillator Indicator and stochastic indicator.
Understanding Awesome Oscillator Indicator
The Awesome Oscillator Indicator is used to measure market momentum and to affirm trends or to anticipate possible reversals. The AO oscillator is a boundless indicator anchored around a zero line and compares recent market movements to historic market movements.
The AO indicator is displayed as a histogram of the average of two simple moving averages, five-day SMA and 34-day SMA. Of these, one covers recent momentum and the other a longer period in the market. It may be noted that instead of the closing price, the indicator uses the bar midpoint value. Red color of the histogram indicates that the bar is lower than the previous one. A green bar in the histogram is in turn higher than the one before.
BTCUSD – Awesome Oscillator – Components
Trading using Awesome Oscillator Indicator
- Whenever the AO indicator crosses above the zero line, it indicates that the short-term momentum (5-day SMA) is increasing faster compared to the longer-term momentum (34-day SMA). This is considered as a bullish market.
- Whenever the AO indicator crosses below the zero line, it indicates that the short-term momentum (5-day SMA) is decreasing rapidly compared to the longer-term momentum (34-day SMA). This is considered as a bearish market.
- Traders use saucer strategy to identify potential rapid changes in momentum. This strategy looks for changes in three consecutive bars that are on the same side of the zero line.
- When the Awesome oscillator is above zero and two consecutive red bars are followed by a green one, the saucer is considered to be bullish.
- When the Awesome oscillator is below the zero line and two consecutive green bars are followed by a red one, the saucer is defined as bearish.
- Traders use the twin peaks strategy for identifying upcoming bullish and bearish trends.
- When both peaks are below the zero line, the second peak is higher than the first one and is followed by the green bar, and the trough between the peaks stays below the zero line, the crypto is considered bullish.
- When both peaks are above the zero line, the second peak is lower than the first one and is followed by the red bar, and the trough between the peaks remains above the zero line, the crypto is considered bearish.
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.
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.
Crypto trading strategy based on Awesome Oscillator indicator and Stochastic
Today’s crypto trading strategy focuses on using the Awesome Oscillator 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 Awesome Oscillator crosses above the Zero line. Traders typically exit the trade when the Awesome Oscillator crosses below the zero line while the stochastic is moving down from overbought levels and the %K line is below the %D line.
BTCUSD – Buy Criteria – Awesome Oscillator 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 Awesome Oscillator crosses below the Zero line. Traders typically exit the trade when the Awesome Oscillator crosses below the zero line while the stochastic is moving higher from oversold levels and the %K Line is above the %D line.
ETHUSD – Sell Criteria – Awesome Oscillator and Stochastic
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 ROC indicator and Stochastic can help you identify profitable trade setups and help in avoiding false signals.
Happy trading!
Trades of the Day Research Team