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 Money Flow Index (MFI) indicator and Fibonacci Retracement.
Understanding the Money Flow Index (MFI) Indicator
The Money Flow Index (MFI) indicator measures the flow of money into and out of crypto over a specified period of time. The MFI indicator uses both price and volume to measure buying and selling pressure on a financial instrument. MFI is also known as a volume-weighted version of RSI as it is interpreted similarly to the RSI oscillator. However, the main difference in MFI is with regard to volume.
The MFI indicator plots a line on the chart that oscillates between the 0 and 100 levels. MFI above 80 is considered as overbought condition and below 20 is considered as oversold condition.
MFI Indicator
MFI generally favors the bulls when the indicator is above 50 and the bears when below 50.
Traders also use divergences between the prices and MFI to trade cryptos. Bullish Divergence occurs when the price moves to a new low, whereas, the MFI moves to a higher low that shows a boost in money flow. This indicates that the selling pressure is decreasing, and presents an opportunity of buying cryptos at lower prices.
A bearish divergence occurs when the price shifts to a new high whereas the MFI indicates a lower high. This indicates a decrease in buying pressure and an opportunity for sellers to make profits.
Understanding the Fibonacci Retracement
Fibonacci retracements are often used as part of a trend-trading strategy. In this strategy, traders assume that a price has a high probability of bouncing from the Fibonacci levels back in the direction of the initial trend.
Fibonacci retracement lines are created by dividing the vertical distance between the high and low points by the key Fibonacci ratios. The key Fibonacci ratios are 23.6%, 38.2%, 61.8%, and 100%. These ratios usually act as a support or resistance level. In addition to the above-listed ratios, 50%, as well as 78.6% retracement levels are also for identifying support or resistance.
Whenever the price of the crypto retraces to a key Fibonacci retracement level such as 38.2% or 61.8%, these levels provide signals for traders to enter new positions in the direction of the original trend. In an uptrend, traders would go long (buy) on a retracement down to a key support level. In a downtrend, traders would go short (sell) when crypto retraces up to its key resistance level. The tool works best when crypto is trending up or down. Defining the primary trend with Fibonacci is done by measuring each pullback of the crypto.
The figure below shows how BTCUSD had taken support at its key Fibonacci retracement levels before continuing its upmove. The support taken by the crypto is marked on the chart.
Fibonacci Levels
Fibonacci levels are also used by traders when they want to buy particular crypto but missed out on a recent uptrend. In this situation, traders would wait for a pullback. By plotting Fibonacci ratios such as 61.8%, 38.2%, and 23.6% on a chart, traders may identify possible retracement levels and enter potential trading positions.
Crypto trading strategy based on MFI and Fibonacci Retracement
Today’s crypto trading strategy focuses on using the Fibonacci Retracement in conjunction with the MFI indicator for accurate entry and exit.
MFI helps pick out optimal entry points when trending markets are retracing. The combination of the MFI indicator and Fibonacci can help in identifying definitive zones where a retracing market can find support or resistance.
Buying Rules
The buy signal is generated whenever the MFI line crosses above 50, and the price retraces to key Fibonacci support levels. Traders typically exit the trade when the price reaches a Fibonacci resistance and the MFI indicator moves below 50.
BTCUSD – Buy Criteria – MFI and Fibonacci
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 MFI line crosses below 50, and the price retraces to key Fibonacci support levels. Traders typically exit the trade when the price reaches a Fibonacci resistance and the MFI indicator moves above 50.
ETHUSD – Sell Criteria – MFI and Fibonacci
As you can see from the chart of ETHUSD, the crypto started moving lower once the sell criteria were fulfilled.
Using the Fibonacci Retracement in conjunction with the MFI indicator can help you trade cryptos better. Using the two indicators in tandem can help avoid false signals and create profitable trading.
Happy trading!
Trades of the Day Research Team