Crypto Trading Strategies: MACD and RSI

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 relative strength index (RSI) indicator and the Moving Average Convergence Divergence indicator (MACD) indicator.

Understanding the MACD Indicator

The MACD indicator measures the relationship between the 26-period Exponential Moving Average (EMA) and the 12-period EMA. MACD is an indicator that follows the trend and is used to give you an idea of how overbought or oversold a market condition exactly is.

The MACD indicator consists of three parts: MACD line (blue color), MACD Signal Line (orange color), and the MACD Histogram. The line at the center is called the zero line.

MACD Indicator – Components

MACD Crosses

MACD crosses can provide confirmation of a trend change, at least in the short term. MACD crosses indicate a shift in trend momentum, translating to buy or sell signals. There are two types of MACD crosses.

Bullish Cross: When the MACD line crosses above the MACD signal line, it is known as a bullish cross.

Bearish Cross: When the MACD line crosses below the MACD signal line, it is known as a bearish cross.

MACD – Bearish And Bullish Cross

Understanding RSI indicator

RSI is short for Relative Strength Index. RSI is a momentum indicator that measures the speed and change of price movements and can be used to identify trend reversal.

The RSI is calculated using average price gains and losses over a given period of time. The default look-back period for RSI is 14.

RSI value oscillates between 0 and 100. When the RSI value is above 70, it is considered as overbought, and when RSI is below 30, it is considered as oversold. Some traders prefer to use 75/25 or even 80/20 to define overbought and oversold levels.

RSI Indicator – Oversold and Overbought Levels

Crypto trading strategy based on MACD and RSI

Today’s crypto trading strategy focuses on using the RSI indicator in conjunction with the MACD indicator for accurate entry and exit.

Buying Rules

The buy signal is generated whenever the MACD line crosses above the signal line and is below the zero line, and the RSI is above 30. It may be noted that some traders prefer to wait for confirmation of an upward trend by waiting for the MACD line to cross over the zero line before opening a long position.

BTCUSD – Buy Signal using RSI and MACD

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 MACD line crosses below the signal line and is above the zero line, and the RSI is moving below 70. Again, many traders wait until the MACD line crosses below the zero line, before entering short positions.

ETHUSD – Sell Signal – Using MACD and RSI

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 MACD indicator in conjunction with the RSI indicator 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 one of the indicators, MACD or RSI, signals a shift in momentum. For instance, if a trader has a long position, he may choose to exit the trade if a bearish MACD cross occurs. Similarly, he may exit his short positions if a bullish MACD cross occurs.

Happy trading!

— Trades of the Day Research Team

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