Cryptocurrency Trading Strategies
Cryptocurrencies are like other asset classes in that they trade based on supply and demand. One of the best ways to learn how to trade a cryptocurrency is to use technical analysis. Technical analysis is the study of price action. You can evaluate the level of support and resistance, momentum as well as overbought/oversold levels. Each of these processes can help you make a trading decision and develop trading strategies.
Finding Support and Resistance
Getting in and out of trades is one of the strategies you can use to better understand optimal times to enter and exit a trade. Support is a level where prices find themselves having a difficult time moving below. There is solid demand at support levels, as buyers step in to buoy prices. Resistance on the other hand, is a level where supply outweighs demand. Here, levels have a difficult time moving higher.
In the Bitcoin price chart below, the 10-day moving average becomes the support, which used to be the resistance. The 10-day moving average is the average of the last 10-days. The eleventh day is the first day in which the calculation is dropped. Another way to find support and resistance is by using Fibonacci retracement levels. Here you can measure the change in the move from a recent high to the recent low and find target levels where Bitcoin will naturally move to.
Momentum describes the acceleration or deceleration in the price of a crypto currency. One of the more popular momentum indicators is the moving average convergence divergence index (MACD). The MACD was created by Gerald Appel. The index measures the changes in moving average and determines if momentum is decelerating or accelerating.
Many traders will use a MACD crossover signal to find levels when momentum is accelerating. A crossover buy signal, which is the green arrow in the Bitcoin chart, shows when the MACD line (the 12-day moving average minus the 26-day moving average) crosses above the MACD signal line (the 9-day moving average) of the MACD line. Many traders indicate that it could be a good time to purchase bitcoin. A crossover sell signal (the red arrow in the chart), shows you when the MACD line crosses below the MACD signal line. This also tells you when negative momentum is accelerating, and is often interpreted as an indication to sell bitcoin.
Overbought and Oversold
If you believe that the price of bitcoin has become overextended, then you can use the relative strength index (RSI) to generate a buy or sell signal. The RSI is a momentum oscillator that measures accelerating and decelerating momentum, as well as generates overbought and oversold signals. When the RSI declines below the oversold trigger level of 30, the RSI generates a buy signal. When the RSI moves above the overbought trigger level of 70, a sell signal is created. Some trader’s like to wait until the RSI moves from overbought to neutral to sell or wait until it moves from oversold to neutral to buy.
By using a combination of technical analysis tools, you can find levels where you can enter, and exit based on support and resistance. Pinpoint where momentum is accelerating or decelerating. Also, find levels where prices are overbought or oversold.