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Continuing on from Part 1 we now move to look at some intermediate crypto trading strategies
4. Using Bollinger Bands to Generate Reliable Trading Signals
The following strategy that we are going to discuss is universal. That is, it can be applied to any financial market, including cryptocurrencies. It can be used for day trading as well as swing trading. The high volatility experienced with cryptocurrencies offers potential opportunities to grow our account exponentially. Similar to how we discussed a strategy based on the RSI indicator, here is a crypto trading strategy based on the popular Bollinger Bands.
Bollinger Bands is a technical indicator developed by John Bollinger in the 1980s. The indicator consists of three bands; one above the above price action, one below the price action, and another is a centre line representing the moving average. The upper and lower band expand and contract according to the volatility of the market.
The simplest way to trade the Bollinger band is to sell when the price hits the upper band and buy when it hits the lower band. You can use this approach in the volatile markets. However, in trending markets, this approach is not successful enough.
Riding the Trend
The image below represents buying opportunities using the Bollinger Band indicator. In a buying trending market, we choose to go long every time price action hits the lower band.
In each trade, we scaled the positions and made nearly 5000 points.
The image below represents a sell example on BTC/USD. Initially, the price action was in a downtrend. When the price hits the upper band, it is a signal to go short. Finally, once the indicator reverses in the opposite direction, exit all your positions.
Trading the Double Bottom Setup with Bollinger Bands
Double bottom trading is simple and the most effective trading method. The double bottom shows that the sellers attempted to push the pair to a downtrend but failed both times to establish a lower low. The double bottom pattern on the Bollinger gives a stronger signal to go long.
As you can see, when we took a long position at the overbought area, the uptrend became stronger and witnessed new higher highs.
Trading the Middle Band
Most trading websites discuss how to trade the lower or upper band, but very few talk on trading the middle band. So, here’s a strategy using the middle band.
When the price action is in a downtrend, the price holding at the middle band means buyers are desperate to take the prices higher, and all the orders are being accumulated here.
In the below chart, we can see that the market gave three trading opportunities at the middle band, and each opportunity performed like a charm.
Strategy Pros
- The significant advantage of the indicator is its band. The bands give us the idea of where the price action could potentially go. Furthermore, prices staying inside the Bollinger band makes it easier to trade the market.
- It is easy to interpret and simple to trade. We believe that beginners should always use this indicator because it is one of the most straightforward and profitable strategies.
Strategy Cons
- The trend doesn't change instantly when the price hits the upper or lower band. Sometimes, in trending markets, prices linger around the upper and lower bands for a while.
- The indicator works very well in volatile conditions but is less reliable in trending markets.
The BB indicator consists of three bands – one above, one below, and one centre. The default settings of the indicator are 20,2, which can be adjusted according to the trade’s trading style. The above-explained strategies are proven ones, but to use them effectively, we suggest you practice it on a demo account before putting real money into it.
5. Generating Profits by Using the ‘TRIX Indicator’ While Trading Cryptos
It is disturbingly easy for new traders to wipe out their fortunes by believing in some scam articles published by fake brokers or exchanges. Not putting in the hard work and time to learn how to trade profitably is the very first mistake they make. Like any other financial markets, trading cryptocurrencies requires knowledge, patience and undying enthusiasm. If you have been trading in stocks, bonds, forex, penny stocks, futures, or options, then you are in good shape as the technical analysis of these financial assets is the same.
TRIX Indicator
TRIX is a momentum indicator developed by Jack Hutson in the early 1980s. This indicator displays the percentage rate of change to a triple exponentially smoothed moving average. The purpose is to filter out all the insignificant price movements. This indicator oscillates above, and below the zero lines and thereby identifies the overbought and oversold trading signals.
The positive values of the indicator indicate the buying momentum and the negative values indicate the selling momentum. When the TRIX indicator line goes above zero, it can be considered a buy signal, and when it goes below zero line, we can assume that a sell signal is generated.
In lower time frames, this indicator is more volatile, and it generates a lot of false signals. Therefore it is always suggested to use this indicator on a higher timeframe where fewer but more accurate signals are generated. Advanced traders mostly use this indicator to find the divergence between the price and the indicator. The bullish and bearish reversals can be used to spot the upcoming reversals.
Overbought and Oversold Trading
The image below represents a buy entry in the LTC/USD pair. As you can see, the pair was in a downtrend first, and when the price action approached the oversold area, it indicates the exhaustion of sellers. When the indicator gave the reversal at the oversold area, it was a sign for us to go long.
After our entry, the price of the pair did not rise instantly. Instead, the market turned sideways for an extended period. This is because the original trend was down, and the sellers were trying to take the prices down, but they failed to do so, and we witnessed a brand new higher high.
The image below represents a sell trade in the LTC/USD pair. As you can see, the pair was in an overall downtrend. When the price approaches the nearest resistance area, we can see the TRIX indicator approaching the overbought area.
The price action bounced back from the resistance level, and as the TRIX indicator turned down as well, we chose to go short. After our entry, price action attempted a further uptrend but failed as the pair adopted a steady downtrend and registered a lower low.
Centreline Strategy
Centreline is the most effective strategy you can use when trading cryptos using the TRIX indicator. When the price action goes above the zero line, it means that the trend is gaining momentum, and you can quickly expect the pair to form brand new higher highs.
So, when the indicator goes above the centre line, it is an indication for us to go long. As soon as we entered the market, we can see the price action blasting to the north, forming a new higher high. We placed out stop-loss order just below the entry, and we closed our entire position when the indicator approached the overbought area.
The image below represents the sell trade in the ETH/USD crypto-fiat pair. As you can see, the pair was in an uptrend, and we were trading the counter-trend moves. When the TRIX indicator goes below the zero line, we have opened a short position. After opening the short position, the price trended sideways for a while then adopts a downtrend forming new lower lows.
Using Breakout to Trade the Centreline
In this TRIX strategy, we choose to trade the centre line but only when the price action breaks the main level. This strategy is preferred because there are times the centreline alone fails to provide accurate entry and exit signals. To filter out the false signals, we have combined them with a breakout strategy. Let's see how this works.
In the image below the pair was in a downtrend and when the price action breaks the most recent lower high, the TRIX indicator also went above the zero line. After our entry, we can see the price action developing a new higher high.
The image below represents a sell trade in the BTC/USD pair where the pair was in a downtrend. During the pullback phase, buyers were trying to go up, but they failed to do so. We can see that the breakout line was the support area for the buyers where they try twice to take the price higher, but failed to do so. In this case, we must go short in this pair when the price action breaches the breakout line. You must note that at this stage, the TRIX indicator was also below the zero line. Right after going short, we can see the price crashing and continue to go south.
Strategy Pros
- The TRIX indicator is a trend following indicator, but it performs way better than the other trend-following indicators. This better performance is because of its excellent filtration of market noise, and that’s the USP of this indicator.
- This indicator measures the difference between each bar smoothed version of the price information, which makes it one of the most popular indicators in the market. Therefore, all the short-term price movements that indicate a change in the market direction will be eliminated.
Strategy Cons
- This indicator generally fails to generate any trading signal in the choppy or ranging market. With these conditions, it creates a tight range near the zero line, which makes it impossible for the traders to identify the signals.
- In a trending market, this indicator lingers at the extremes of the overbought and oversold regions for long. Sometimes, it goes beyond the daily range bounds. This makes it difficult for us to rely on TRIX when the markets are trending.
To ensure utmost accuracy while trading signals generated by the TRIX indicator, only trade the overbought and oversold areas when you see the reversals near the 100 levels on either of the sides. If the price action goes above the 100-line, it means that the trend is strong. In this case, wait for the reversal below the 100 level to take a sell. The TRIX indicator has proved to be very useful, especially with the high volatile conditions that crypto trading is surrounded by.
6. Pattern Trading - Identifying Buy/Sell Signals Using the Engulfing Pattern!
Relying our decisions of going long or short in any financial market on the appearance of a particular pattern is known as pattern trading. Price charts print various types of patterns that resemble the things that we see in our daily life. In the next couple of strategies, we will be discussing such patterns and how to trade them. Let’s start with the Engulfing Candlestick pattern.
Engulfing Pattern
This pattern is used by technical analysts to spot the upcoming reversals in the market trend. The Engulfing is a two-candle pattern which has both bullish reversals and bearish reversals.
The appearance of the Bullish Engulfing pattern on the price charts indicates that the sellers failed to take the market further down. It implies that the market has net buyers, resulting in the market to trend upwards, forming higher highs. Conversely, the bearish Engulfing pattern indicates the buyers have reached their limit. The market now has net sellers who drive the prices to lower lows.
In practice, it is important to note that there is no such thing as a perfect Engulfing pattern. You will rarely see a perfect textbook style pattern, as shown in the image above. Therefore, be keen to spot even the faintest of patterns resembling the Engulfing pattern. The first candle of the bullish engulfing pattern will be red, which means sellers are strong and the next and the second candle of the pattern will be green and it will completely overtake (engulf) the first red candle. This candle indicates that the sellers have failed to lead the market, and the strong buying candle is a sign of buyers being the net participants in the market. This pattern tends to result in an uptrend.
Breakout Trading By Using the Engulfing Pattern
Buy Trade
The image below represents the formation of a bullish engulfing pattern on the XRP/USD price chart.
The next image represents our buying entry in the XRP/USD pair. The first thing we did is to identify the pattern, and waited for the price to break the significant resistance level to open a position. At times the price action develops the bullish engulfing pattern, but the price does not trend upwards. If you just go by the definition and trade the pattern right away, you may end up on the losing side.
Therefore, to confirm the strength of the pattern, we choose to make an entry after the price reaches any significant level. As we opened the position, the price raised and retracted, but didn't break the primary support level. This strategy will help to filter out the low probability bullish Engulfing pattern easily. In this particular trade, we placed the stops just below the pattern formation area, and for the take-profit level, we chose the new higher high.
Sell Trade
The image below represents the formation of a bearish Engulfing pattern in the BCH/USD crypto pair.
The next price chart represents the entry, exit, SL and TP in the BCH/USD pair. As you can see, the price action was in an overall uptrend, and at the end of the trend, the market has printed a Bearish Engulfing pattern.
The flow was firmly up, so we decided to let the price action breach the significant support level before going short. As you can see, the price action began to struggle at the support area, so we decided to close our entire position at the next significant support level.
Combining the Bullish Engulfing pattern with Moving Average and RSI
This is a unique trading strategy created by us to trade the Crypto market alone. Here, we used the 200 period MA to confirm the trend direction, and we paired the RSI with the Engulfing pattern to confirm the pattern’s strength. Engulfing is a trend reversal pattern which often gives a lot of signals in trending conditions. This pairing with RSI will avoid most of the inaccurate signals.
Bullish Engulfing Pattern
The price chart below represents the formation of the bullish Engulfing pattern on the LTC/USD crypto-fiat pair.
In the below price chart, when the market developed a Bullish Engulfing pattern, the 200-day Moving Average was also below the price indicating a clear uptrend. Also, the RSI indicator was at the oversold area, which represents the exhaustion of sellers in the market and the gaining momentum of buyers. At this point, all of the three technical tools are indicating a buy signal. Hence, we opened our position here and then placed the stops below the pattern formation. After our entry, we can see the price shooting up to form new higher highs.
Bearish Engulfing Pattern
The image below represents the formation of a bearish Engulfing pattern in the BCH/USD pair.
As you can see in the below the price chart, right when the market developed a Bearish Engulfing pattern, the 200-day Moving average progresses above the price action. This trend indicates that long-term sellers are entering the market. At this point, the RSI indicator gave a sharp reversal at the overbought area, which is an additional confirmation for us. We opened a short position here with smaller stops and chose to wait for new lower lows to be formed.
The significant advantage of this strategy is when you identify the pattern on the price chart, the market tends to immediately react. And you won't have to stop out 2 -3 times to establish the validity of the trend reversal.
Strategy Pros
- The bullish Engulfing pattern is very easy to spot, and this is the single most advantage in pattern trading. It is a very simple and most effective pattern to trade as well.
- For a beginner trader, this pattern is straightforward to master. All they need to do is to identify the pattern visually and trade accordingly. There are no complex calculations needed.
Strategy Cons
- The Engulfing pattern is more useful when the ongoing trend is steady, as the pattern shows the momentum shifting to the opposite. So, in a highly volatile market trend, it becomes difficult for traders to trade this pattern.
- Sometimes the second candle of the pattern will be longer, which can leave the trader with a larger stop-loss. If you are using larger stops, your take profit should be bigger as well to maintain optimum Risk to Reward ratio. A trader is then forced to go for larger targets which might be challenging to attain.
As shown in the strategy, make sure to pair a couple of other technical indicators to the engulfing pattern to determine the validity of trend reversal. While backtesting, we found that the second strategy (MA + RSI) only gave 30 to 40 trades a year in a single pair as many things have to line up to confirm the signal. But the significant advantage of the second strategy is that it works 95% of the time. Thus, using it to trade high volatile crypto can be useful as you can quickly grow your small trading account in a couple of months.
Part 3
Thats it for the intermediate strategies, now lets move on to PART 3 to look at advanced strategies for trading crypto
