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 Bollinger Band and Stochastic indicator.
Understanding Bollinger Bands
Bollinger Bands are a powerful technical indicator that encapsulates the price movement of a cryptocurrency. They are used to measure a market’s volatility. Bollinger bands can also identify “overbought” or “oversold” conditions.
There are three bands in a Bollinger band – upper band, middle band, and lower band. The upper and lower bands are a measure of volatility to the upside and downside. They are calculated as two standard deviations from the middle band. The middle band is actually the simple moving average, typically for a period of 20 days.
BTCUSD – Bollinger Bands
Bollinger Bands and Volatility
Bollinger Bands can adapt dynamically to price expanding and contracting as volatility increases and decreases. This means that the wider the band, the more the volatility; and the narrower the band, the lesser the volatility. Whenever the price is stable, the bands are seen to be in a narrow range.
Bollinger Bands as Support and Resistance
Bollinger bands also act as dynamic support and resistance levels. This is because the price tends to return to the middle of the bands. Traders typically use this ‘Bollinger Bounce’ as a trading strategy when the market is ranging and there is no clear trend.
Understanding 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.
BTCUSD – Stochastic Indicator
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 Bollinger Bands and Stochastic
Today’s crypto trading strategy focuses on using the Bollinger Bands and Stochastic for accurate entry and exit.
Buying Rules
The buy signal is generated when the price action hits the lower Bollinger band, and the Stochastic is at the oversold area.
BTCUSD – Buy Signal – BB-Stoch Strategy
When a candle is formed below the lower Bollinger band which is immediately followed by another candle above the lower band, and the Stochastic is at the oversold area, it generates a buy signal.
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 price action hits the upper Bollinger band and if the Stochastic is at the overbought area, we can go short.
ETHUSD – Sell Signal – BB-Stoch Strategy
When a candle is formed above the upper Bollinger band which is then followed immediately by a candle that is below the upper band, and the Stochastic is at the overbought area, it generates a sell signal.
As you can see from the chart of ETHUSD, the crypto started moving lower once the sell criteria were fulfilled.
Trading Within a Range
This strategy is also ideal for cryptos that are stuck in a trading range. The BTCUSD chart below shows that the crypto was trading within a range.
BTCUSD – Range Trading Using Bollinger Bands and Stochastic
The trader can simply buy when the crypto tests the low end of its range and the lower band and the stochastic is in oversold territory. Conversely, the trader can sell when the crypto tests the high of the range and the upper band and the stochastic is in overbought territory.
As you can see, the crypto trading strategy based on Bollinger Bands and Stochastic can help you identify profitable trade setups. This is because including both Bollinger Bands and Stochastic when choosing the entry and exit levels help in avoiding false signals.
Moreover, this strategy can be used in a trending market as well as a range-bound market, making this uniquely suited for almost all types of traders.
Happy trading!
Trades of the Day Research Team