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 trendline and stochastic indicator.
Understanding Trend Lines
A trend line is a straight line that connects two or more price points. When extended into the future, trendlines act as a line of support or resistance.
Trend lines can help in identifying potential areas of increased supply and demand and picking out buying and selling opportunities that occur within a strong trend.
The two types of trends
In Technical Analysis, a trend is defined as the direction of the market. A trend can be of two types: uptrend and downtrend.
A cryptocurrency is said to be in an uptrend if it forms a series of higher highs and higher lows. Conversely, when the cryptocurrency forms a series of lower lows and lower highs, it is said to be in a downtrend.
A trend is said to be bullish as long as the price action stays above the uptrend line. A trend is said to be bearish as long as the price action stays under the downtrend line.
How to draw a trend line
To draw an uptrend line, you must first find the swing lows (also called bottoms or pivot lows). These are marked as points 1, 2, and 3 in the chart below. Then all you need to do is simply connect the three (or more) points using a diagonal line.
BTCUSD – Uptrend Line
To draw a downtrend line, you must first find the swing highs (also called tops or pivot highs). These are marked as points 4,5, and 6 in the chart below. Then all you need to do is simply connect the three (or more) points using a diagonal line.
ETHUSD – Downtrend Line
It may be noted that a trend line can be drawn from the high/low of a candle or the open/close of the candle.
Trendline as Support and Resistance
As you can see from the charts, a trendline can act as a support or resistance. In case the Cryptocurrency is in an uptrend, the trendline would act as a support. Similarly, in case Cryptocurrency is in a downtrend, the trendline would act as a resistance.
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.
BTCUSD – Stochastic Indicator
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 stock 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 Trendline and Stochastic
Today’s crypto trading strategy focuses on using trendline in conjunction with the stochastic indicator for accurate entry and exit.
During an Uptrend
As can be seen from the chart below, BTCUSD was in an uptrend and was making a series of higher highs and higher lows. The uptrend line was drawn by joining the higher lows and would act as a support level.
Buying Rules
The buy signal is generated when the price touches the trend line after a correction and at the same time, the stochastic starts to move higher from near the oversold zone (near 20). These buy levels are marked as pink color ellipses in the chart.
BTCUSD – Buy Signal Using Trendline and Stochastic
The exit signal would be when the price breaks below the uptrend line.
During a Downtrend
As can be seen from the chart below, ETHUSD was in a downtrend and was making a series of lower highs and lower lows. The downtrend line was drawn joining the lower highs and would act as a resistance level.
Selling rules
The sell signal is generated when the price heads back up to the downward sloping trendline and at the same time, the stochastic starts to move lower from near the overbought zone (near 80). These sell levels are marked as purple color ellipses in the chart.
ETHUSD – Sell Signal Using Trendline and Stochastic
The exit signal would be when the price closes above the downtrend trendline.
As you can see, this price action trading system for cryptocurrencies is both simple and effective, as the stochastic indicator can be used as a confirmation for filtering the trade setup.
Bonus: How Scalpers Use The Crypto Strategy
This trading strategy is also well-suited for scalpers. Scalping is a trading style that specializes in profiting off of small price changes and making a fast profit off reselling. Understandably, such trades require a tight stop loss.
Scalpers who trade cryptos that are on an uptrend enter positions when the cryptocurrency touches the uptrend line after a correction and the stochastic is moving higher from near the oversold zone (near 20). The stop loss for the trade is placed below the most recent swing low.
Scalpers who trade cryptos that are on downtrend enter positions when the cryptocurrency heads back up to the downward sloping trendline and the stochastic is moving lower from near the overbought zone (near 80). The stop loss for the trade is placed above the most recent swing high.
Happy trading!
Trades of the Day Research Team