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 Rate of Change (ROC) indicator and stochastic indicator.
Understanding Rate of Change (ROC) indicator
The Rate of Change (ROC) indicator is a pure momentum oscillator that measures the percent change in price from one period to the next. This means that the ROC indicator measures the percentage change in the current price and the price N periods ago.
The ROC indicator oscillates above and below a zero level and moves in tandem with the price.
If the crypto price is rising compared to N-periods before then the ROC will be positive. Conversely, if the crypto price is falling compared to N-periods before then the ROC will be negative.
- A sharp surge in the ROC readings indicates a bullish trend
- A sharp decline in the ROC readings indicates a bearish trend.
- When the ROC hovers above and below the zero line, it indicates consolidation.
- The crossover of the ROC zero line can indicate a shift in the prevailing trend.
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.
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 ROC indicator and Stochastic
Today’s crypto trading strategy focuses on using the ROC indicator in conjunction with the stochastic indicator for accurate entry and exit.
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 ROC crosses above the Zero line. Traders typically exit the trade when the ROC delivers a bearish divergence signal. A bearish divergence is a pattern that occurs when the price reaches higher highs, while the indicator makes lower highs.
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 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 ROC crosses below the Zero line. Traders typically exit the trade when the ROC delivers a bullish divergence signal. A bullish divergence is a pattern that occurs when the price reaches lower lows, while the indicator makes higher lows.
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 ROC indicator and Stochastic can help you identify profitable trade setups and help in avoiding false signals.
Trades of the Day Research Team