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 Relative Vigor Index (RVI) Indicator and stochastic indicator.
Understanding the Relative Vigor Index (RVI) Indicator
The Relative Vigor Index Indicator is used to anticipate changes in market trends by comparing the crypto’s Close price and Open price to measure the strength of price movements. The RVI is an oscillator based on the concept that prices tend to close higher than they open during uptrends and close lower than they open during downtrends.
The indicator appears as two lines – the Relative Vigor Index (RVI) line, and the signal line. The RVI indicator fluctuates around the center line and it travels from above to below zero, and vice versa. The RVI compares the asset’s closing price to a recent price range and generates values of the power behind price movements. The higher the values it generates, the stronger the trend should be.
RVI Indicator – Components
The key weakness of the RVI is that it is practically useless in the ranging markets when the price action doesn’t move in a clear uptrend or downtrend.
Trading using Relative Vigor Index Indicator
- Bullish crossover: Whenever the RVI indicator crosses above the signal line, it is considered a bullish sign.
- Bearish crossover: Whenever the RVI indicator crosses below the signal line, it is considered a bearish sign.
- High values are interpreted as a strong overbought condition, or ‘selling’ signal.
- Low values are interpreted as a strong oversold condition, or ‘buying’ signal.
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.
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.
Stochastic – Components
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 Relative Vigor Index indicator and Stochastic
Today’s crypto trading strategy focuses on using the Relative Vigor Index 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 RVI line is above the signal line. Traders typically exit the trade when the RVI indicator stays below the zero line while the stochastic is moving down from overbought levels and is below 50, and the %K line of the stochastic is below the %D line.
BTCUSD – Buy Criteria – RVI 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 RVI line is below the signal line. Traders typically exit the trade when the RVI indicator stays above the zero line while the stochastic is moving higher from oversold levels and is above 50, and the %K Line of the stochastic is above the %D line.
ETHUSD – Sell Criteria – RVI 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 the Relative Vigor Index indicator and Stochastic can help you identify profitable trade setups and help in avoiding false signals.
Happy trading!
— Trades of the Day Research Team
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