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 Detrended Price Oscillator and Exponential Moving Average.
Understanding the Detrended Price Oscillator
The Detrended Price Oscillator removes the influence of a long-term trend on the current prices, thereby allowing traders to estimate the longevity of a trend and forecast an upcoming reversal.
Since the DPO indicator does not react to the most current price action, it can be used to identify intermediate overbought and oversold levels effectively.
Centerline crossover at the zero line in Detrended Price Oscillator usually indicates bullishness and bearishness.
Bullish Scenario: Whenever the DOP is greater than 0 and is going up, then we can consider it to be a bullish scenario. Prices typically start to rise after that.
Bullish Cross: Whenever DOP is less than 0 and is going down, then we can consider it to be a bearish scenario. Prices typically start to fall after that.
Understanding Exponential Moving Average
Moving Averages are trend-following lagging indicators and help in ‘filtering out’ the noises from the price fluctuations, thereby giving a clearer picture of the crypto’s direction.
Moving averages are mainly used for identifying the trend direction of the crypto and for identifying the support and resistance levels of the crypto. They also form the basis of some of the indicators.
Exponential Moving Average is a type of moving average that is formed by giving a higher weightage to the recent close prices of the crypto over a specific number of days.
Whenever the moving averages are rising, or the price of crypto crosses above the MA, it points to an uptrend. Similarly, whenever the moving averages are falling, or the price of crypto crosses below the MA, it points to a downtrend.
- Bullish signal: Whenever a shorter-term EMA (blue color) crosses above the longer-term EMA (purple color), it shows upward momentum. A possible bullish signal is generated in this case.
- Bearish signal: Whenever a shorter-term EMA (blue color) crosses below the longer-term EMA, (purple color) it shows a downward momentum. A possible bearish signal is generated in this case.
Crypto trading strategy based on Detrended Price Oscillator and Exponential Moving Average
Today’s crypto trading strategy focuses on using the Detrended Price Oscillator in conjunction with the Exponential Moving Averages.
The buy signal is generated whenever the Detrended Price Oscillator is above the zero-line, and the shorter-term EMA (10-day EMA) is above the longer-term EMA (21-day EMA).
Traders tend to exit the trade once the DPO indicator crosses below the zero line as well as the shorter-term EMA (10-day EMA) stays below the longer-term EMA (21-day EMA) for five successive days.
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 whenever the Detrended Price Oscillator is below the zero-line, and the shorter-term EMA (10-day EMA) is below the longer-term EMA (21-day EMA).
Traders tend to exit the trade once the DPO indicator crosses above the zero line as well as the shorter-term EMA (10-day EMA) stays above the longer-term EMA (21-day EMA) for five successive days.
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 Detrended Price Oscillator in conjunction with the Exponential Moving Averages can help you trade cryptos better. Using the two indicators in tandem can help avoid false signals and create profitable trading.
Trades of the Day Research Team