Guides / Best Crypto Trading Strategies - Part 3

Best Crypto Trading Strategies - Part 3

Best Crypto Trading Strategies - Part 3

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Continuing on from Part 2 we now move to look at advanced crypto trading strategies

7. The Bladerunner Crypto Trading Strategy

Moving averages is a fundamental tool in technical analysis. It is used by traders for understanding the overall direction of the market and as a powerful tool in designing trading strategies.

There are different variations in moving averages. The ones used commonly include a simple Moving Average (SMA) and Exponential Moving Average (EMA). And in the Bladerunner strategy, we shall be taking the EMA into account.

What is the Bladerunner Trading Strategy?

The Bladerunner is a crypto trading strategy based on the 20-period Exponential Moving Average. It is referred to as "Bladerunner" because the EMA cuts through the price like a blade.

Since the strategy is formed using the moving average, it determines the direction and helps in precision entries as well.

A market trading above the 20-day EMA is considered as a bullish market, while a bearish market when the price action is below the EMA. Hence,

Price above 20-period EMA => look for long (buy) opportunities
Price below 20-period EMA => look for short (sell) opportunities

Now that we know which direction we should be biased on let's understand the timing part of it – entries.

The Bladerunner strategy is both a trend continuation strategy and trend reversal strategy.

Bladerunner trend continuation strategy

When the market is trading well above the 20-period EMA, traders can prepare to go long once the price retrace down to the EMA line.

In contrast, if the market is trading below the 20-period EMA, one can look for shorting opportunities when the price retraces up to the EMA line.

Bladerunner trend reversal strategy

Let's say the market has been trading below the EMA line for a while. The price then reverses in a direction where the EMA cuts through the price action. This indicates that the market is preparing to reverse from a downtrend to an uptrend. Hence, traders can go long when the EMA cuts through the price, and the market begins to hover above the 20-period EMA.

On the flip side, assume a market that is trading above the 20-period EMA. After a few trading sessions, the market turns around, and the price breaks below the EMA line. This signifies that bears have taken control of the market, and the trend could likely continue further. Therefore, traders can go short right after the price cuts through the Exponential Moving Average.

Like any other strategy, this strategy does not perform well every single time. However, to increase the consistency of the strategy, you must always consider a couple of rules before trading the Bladerunner strategy.

Rule 1:

While trading the Bladerunner trend continuation strategy, the market must break through a range or consolidation with significant power. And before the breakout, the price must be trading on either side of the EMA line.

break out of consolidation range

Rule 2:

The price must successfully retrace and test the 20-period EMA line. For instance, in an uptrend, a test can be considered successful if the price drops and turns back to the predominant direction around the EMA line. Moreover, the price should not break below the EMA line and hold.

Bladerunner Trend Continuation Example

Consider the below price chart of ETH/USD on the 1H time frame. It can be seen that the market was consolidating or moving sideways from July 27 to July 30. Before the beginning of the subsequent trading day, the market aggressively broke through the range. The EMA which was above the price action cut through it and moved below the price action. This confirms that the buyers have taken charge of the market.

Thus, once the price pulls back down to the EMA line and a green candle pops up, traders can trigger their buy position.

Eth breaks up out of consolidation range and then bounces off EMA

The stop loss must be placed below the point where the EMA cut through the price action.

There is no fixed take profit level for the Bladerunner strategy. Hence, it is recommended to trade this strategy with a risk-reward ratio of 1:1. After gaining some experience, one can aim for higher take profit levels based on the momentum of the buyers.

Bladerunner Trend Reversal Strategy

The concept to trade the reversal strategy is no different from the trend continuation strategy.

Consider the below chart of Ethereum on the 1-hour time frame. Analysing the market from the left, we can see that the market was in an uptrend. However, after reaching price levels of $216, the price begins to hover sideways.

Later, the market aggressively drops below the EMA line. This indicates the market is preparing to reverse its direction.

Thus, when the price retraces up and begins to drop from the 20-period EMA line, we can hit the short button.

Eth breaks down out of consolidation range and then bounces off EMA

The stop loss can be placed above the level where the price cut the EMA. However, it is recommended to place it above the resistance of the range as the overall trend of the market is still towards the upside.

The take profit varies based on the Stop Loss level. An ideal take profit level would be at 1:1 RRR.

Combined Example

In the above examples, we saw one strategy related to trend continuation and others based on trend reversal. In the following example, let us combine both the concepts and trade using the Bladerunner strategy.

Consider the below chart of the Ethereum against the US Dollar on the 1H time frame. Reading the price action from the left, the market is in an evident uptrend.

Once the market made it all the way up to $177, the price began to reverse its direction. In fact, the price which was well above the 20-period EMA slipped below and continued to trade in the same state.

As per the concept, the price-cutting below the EMA indicates that the sellers have taken control of the market. And the price does follow the expected direction – downwards.

However, at $155, the direction changed yet again where the price crossed above the 20-period EMA, signifying that the buyers are beginning to show strength. As a matter of fact, the overall trend of the market is still towards the upside. And the mini downtrend is simply a retracement/pullback to the predominant trend.

Thus, knowing that the overall trend is up and that the price has currently sliced through the EMA, we can prepare to go north along with the market.

trend direction changes

The stop loss can be kept a few pips below the low of the price where the market reversed from the small retracement.

The take profit can be placed at the most recent high set by the market, as shown.

Strategy Pros

  1. Determines the direction of the market and provides precise entry points.
  2. The strategy can be applied by day traders, swing traders as well as positional traders.

Strategy Cons

  1. No fixed take profit level. Hence, it requires professionalism to manage trades based on this strategy.
  2. Since the moving average is made based on past prices, the strategy is partially lagging in nature.

8. The "Rejection" Strategy

We know that a candlestick is made up of two components – a body and a wick/tail. But have you ever wondered about the logic behind the formation of a body and a wick/tail?

Moreover, since this strategy goes hand in hand with trends, let us comprehend what a trend is, before heading to the strategy.

Trend Comprehension

A trend is the most visible state of the market where the price makes a sequence of higher highs or lower lows.

trending market

The above figure represented an ideal up-trending market. And unfortunately, not all markets move in the same pattern. In essence, a trend can be of several types.

Some other variations in a trend that usually occurs in the cryptocurrency market are shown as follows:

three trend variations

In the above illustrations, note that all the types represent an uptrend. However, they differ in some ways.

Type 1 – the market broke above the Support and Resistance (S&R), retraced a bit and made another higher high.

Type 2 – the market tried to make a higher high in the second push, but retraced back into the S&R, and then continued to make a higher high.

Type 3 – the market made an attempt to make a higher high on the second leg but failed to do so. In fact, it came lower than the low of the previous push and then successfully made a higher high.

The Rejection strategy primarily goes with the Type 3 trend.

What is the Rejection Trading Strategy?

As mentioned, the rejection trading strategy is based on the third type of trend from the above illustration. This counter-trend trading strategy is referred to as "rejection" because the price failed to make a higher high on the second push of the bulls. And this failure/rejection is represented by a wick.

Let us consider an uptrend example to understand the logic behind the strategy. We know that an uptrend is a set of higher highs and higher lows. And if the market fails to breach through the recent Higher high, it is a sign that the trend is preparing for another leg down before shooting north.

The rejection also indicates that the buyers are relatively weak to take the market higher with just one pullback. Hence, with the knowledge that the buyers are slowing down, we as traders can anticipate the push towards the south by taking short positions.

Sell Example

Consider the price chart of LINK/USD in the 4-hour time frame. It is evident that the market is in an uptrend making higher highs and higher lows.

The most recent high was made at the $8.47219 (purple line). From July 13, the price began to retrace. However, when the buyers continued their move up after the retracement, they failed to make a higher high.

This rejection indicates that it is not strong enough to take the market higher yet. And the price could most likely drop for another retracement.

Hence, one can enter for a sell right when the rejection happens or after a couple of failures.

price increase rejection

The stop loss can be placed right above the high of the higher high failure as shown.

One can either aim for a 1:1 RRR or fix the take profit at a significant support level.

Buy Example

Let's analyse the chart of Bitcoin against the US Dollar on the 4-hour time frame shown below.

We can clearly see that the market is in a downtrend. The most recent lower low is priced at $7589.58 as represented by the ray.

The price pulled back to the upside all the way to $8500. The price began to trend lower but was unsuccessful in making a new lower low. The price got rejected, and the bulls shot up in one green candle. This signifies that the sellers are losing momentum and are unable to make a lower low at the moment.

Hence, we can trigger the long positions right after the massive green candle pops up.

price decrease rejection

The stop loss can be placed a few pips below the support or the rejection.

The take profit can be based on the Stop loss by aiming for 1:1 risk-reward ratio.

Strategy Pros

  1. The strategy can be used on any time frame – be it 1min or the 1month.
  2. There are scenarios when the market changes its overall direction after a rejection. Hence, traders get to catch the rock bottom price.

Strategy Cons

  1. It comes with default added risk as it a counter-trend strategy.
  2. There is a possibility for the price to be rejected several times before the trade performs. Thus, there is a higher risk of getting stopped out.

9. The False-Breakout Price Action Strategy

Most first-time traders have an attachment towards trading the breakouts. When a cryptocurrency looks to move in one direction following a breakout, they jump in; then the price quickly retracts, resulting in losses. These can be frustrating and demoralising, but it doesn't have to be.

False breakouts strategy provides one of the best, low risk and high probability setups in crypto trading. Here's how to do it and a strategy for capitalising on false breakouts.

  • Time Frame - The strategy is fixed to two-time frames. The 1-hour and 15-minutes time frame. This means the strategy can be used for intraday trading.
  • Indicators - As this strategy is mostly based on price action, we will be using just one indicator, and that is, the simple moving average (SMA). It is used for trend identification and confirmation during 'entry.'
  • Cryptocurrency - This strategy applies to most of the cryptos listed on the broker's platform. However, we need to make sure that the cryptocurrency is fairly 'liquid'. To determine the liquidity of a cryptocurrency, check out its market capitalisation. The higher the market capitalisation, the higher the liquidity.

Strategy Concept

The strategy is based on the simple concept – that a panic situation is created in the market when price breaks key levels, which activates traders around the world. Rather than acting on trade in real-time as soon as the price breaks a key level, we should wait until the candle closes to confirm the breakout's strength. So, the idea of placing orders above or below a support or resistance level to automatically get into the market is not a very good one. We will be taking advantage of this psychology of traders and materialise on them. This leads to trading what we call as the 'false-breakouts.'

The only way to trade this effectively is to be at our trading terminals ready to act as soon as the candle closes in breakout territory. If the candle does not close in the breakout territory, it is clear that the price movement was created only to cause panic in the market. But all this needs to happen within the context of the overall trend of the market. Therefore, it is not just about the occurrence of breakouts, but also about the market sentiment, psychology and confirmation sign from technical indicators that work collectively to make the strategy work.

Trade Setup

In order to explain the strategy, we have considered the 1-hour chart of BTC/USD where we will be applying the rules of the strategy to execute a 'long' trade.

Step 1

The first step of the strategy is to identify the major direction of the market on our trading time frame. This needs to be done using the 20-period SMA, which helps us determine the short-term trend of the market. If the price is above the SMA making higher highs and higher lows, that means the market is in an uptrend. Likewise, if the price is below the SMA, making lower lows and lower highs, the market is in a downtrend.

In the case of BTC/USD, we see that the market is in a strong uptrend and which is clearly indicated by the simple moving average (SMA).

strong uptrend

Step 2

Once the trend has been identified, we need to wait for the market to form a 'range.' This means there has to be a minimum of two points from where the price found it difficult to go higher and two points below from where the price found it difficult to go lower. This creates key technical levels of support and resistance that will be the basis for the strategy.

The below image shows the formation of a 'range' during an uptrend. We can also refer to this as market consolidation that may give rise to a new rally.

price stuck in a range

Step 3

After the 'range' has been developed, we will watch out for the price action at the 'support' in an uptrend and at 'resistance' in a downtrend. In case of an uptrend, the price action should be such that it should initially go lower and create an impression that the 'support' is broken. Immediately after that, the price should go back up and close above the moving average. What just happened is a false breakdown where many people entered for a 'sell' when the price went below the 'support.' in In a downtrend we will look for similar price action at the 'resistance'.

In our case, we can see how the price tried to break below the 'support' and go lower but was unsustainable. Buyers immediately took the price up, which created a large wick on the bottom.

support and resistance

Step 4

In this step, we discuss the 'entry' part of the strategy. We enter for a 'buy' only when the price closes sufficiently above the moving average after the 'fake-out.' But at the same time, we should ensure that the price is not near resistance. In that case, we will have to wait for another 'fake-out' at the support area. We go 'short' when the price closes sufficiently below the moving average after the 'fake-out' in a downtrend.

As shown in the below image, we go long after the price creates a false-breakdown below the ‘support’ and closes above the moving average.

breakout and moving average

The best part of this setup is that it prevents us from entering the market prematurely by forcing us to wait until the price confirms the breakout or breakdown. If the price is in an uptrend, we watch for false breakdowns while if the price is in a downtrend, we watch for false breakouts. A moving average is an excellent tool which provides us with the extra confirmation needed before entering the market. The strategy works well when we align it with the dominant trend. However, we can still trade the breakouts, using an appropriate breakout strategy.

Strategy Pros

  1. The risk is lower since we are trading in the direction of the market.
  2. No use of complex indicators which makes it easy to understand by novice traders.

StrategyCons

  1. Since we are entering the market pretty late, the risk-to-reward ratio is not that great.
  2. Does not work well in 'ranging' market.

10. Trading Cryptos Using the Flag Pattern

The knowledge of technically analyzing the market can increase your chances of profiting from crypto trading. This strategy is a bit complex but will leave you with an idea of combining multiple technical tools to generate reliable trading signals. In this strategy, we have to use the Flag Pattern, Moving Average and Stochastic oscillator to trade the crypto market.

Flag Pattern

A Flag is a popular trend continuation pattern among technical traders across the world. This pattern moves against the ongoing trend in a shorter time frame. It can be considered a tight consolidation counter move that occurs immediately after a consistent price movement in one direction. You will witness this pattern only in a trending market and not when it is ranging. A bearish flag can be found when the market is in a downtrend, and in an up-trending market, you will witness a bullish flag. The pattern has four primary characteristics:

  • The ongoing trend.
  • The ranging channel.
  • A breakout.
  • Price holding above the pattern to confirm that the price will move in the same direction of the breakout.

Trading Strategies by Using the Flag Pattern

Buy Signal

The image below represents the formation of a bullish Flag pattern in the BCH/USD pair.

flag pattern and break up

In this chart, the price was in a steady uptrend. Once the market forms the Flag pattern, it means that the prices have pulled back enough and soon we can expect the pair to continue its actual trend and form a new higher high. Therefore, after the breakout, we opened a long position, and we can see the pair forming a higher high right after our entry.

Sell Signal

The image below represents the formation of a bearish Flag pattern in the ETH/USD pair.

flag pattern and break down

As you can see in a downtrend when we got the bearish flag pattern, we chose to take a short position when the breakout of the pattern appeared. The stop-loss order was just above the entry, and for the take profit, we selected the level at the new lower low.

take profit at new lower low

Pairing the Flag Pattern with Double Moving Average

To identify the accurate trading signals, we have paired the Flag pattern with the Double Moving average. Although the Flag gives a clear indication of the trend, the double MA is needed for additional confirmation to make an entry.

In our previous strategy on how to trade cryptos using the double MA, we can recall that the entry signals occur when there is a crossover either above or below the price action. We will use this crossover as our primary signal then use the breakout of the Flag pattern as the final signal for us to open a position.

In recap, MA is a trend following indicator, the indicator doesn't predict the price direction, but instead, it defines the current market trend. By smoothing the price data, this indicator cuts the noise on the chart. Just look at the direction of the indicator to figure out the direction of the ongoing trend. If the indicator is angled up, then we can say that the price action is moving up, and if it is angled down, it means the prices of an underlying asset is in a downward trend.

Buy Signal

The below price chart represents our buy entry in the BTC/USD crypto pair.

bullish flag pattern and MA crossover

In the price chart below, we can see the formation of a Flag pattern and moving average crossover signalling a buying entry trade in the BTC/USD pair. The pair was in an overall uptrend, and when the indicator gave the moving average crossover, we can see the flag pattern being formed. This is a clear indication for us that the uptrend is ready to take off.

stop and take profit for the trade

Sell Signal

The below price chart represents a sell trade in the LTC/USD pair.

bearing flag pattern and MA crossover

As you can see, the pair was on an overall downtrend, and during the pullback phase, the market has completed printing the flag pattern. After the formation of the Flag pattern, the double MA crossed above the price action, which means we can expect the breakout of the lower low.

stop loss and take profits for the trade

When this breakout happened, we opened a short position with a stop-loss level just above the crossover and the take-profit level at the next lower low. Overall, it was a good trade with a great Risk to Reward ratio.

Pairing the Flag Pattern with the Stochastic Indicator

In this strategy, we have paired the Flag pattern with the stochastic oscillator to filter out the low probability signals. When the price breaks out of the bullish flag pattern, it means the prices are about to have a renewed uptrend. At the same time, if the stochastic oscillator gives a crossover reversal at the overbought or oversold area, we can take that as an accurate trading signal.

Buy Signal

The image below represents the formation of a flag pattern in the LTC/USD pair.

bullish flag pattern and stochastic reversal

As we can see, the pair was in an overall uptrend. After the completion of the flag pattern, stochastic gave a reversal at the oversold area, which is a clear signal for us to go long.

stop and take profit levels for the trade

Sell Signal

The image below represents a sell trade in the XLM/USD pair.

bearish flag pattern and stochastic reversal

The pair was in an overall uptrend, and during the pullback phase, the price action formed the Flag pattern, which was a signal to go short. At the same time, the stochastic gave reversal at the overbought area, which means the breakout of the Flag pattern is real, and the short trade anticipated would be profitable.

stop loss and take profit levels

Strategy Pros

  1. The Flag pattern is an elaborate chart pattern which possesses minimum risk and quick profits.
  2. Pairing the Flag pattern with a stochastic oscillator and the double MA is simple and easy to understand. It also provides a lot of overbought and oversold trading signals.

Strategy Cons

  1. The Flag pattern is only accurate in a trending market. It becomes inaccurate when markets are volatile.
  2. The stochastic is in a strong trending market it sometimes stays at the overbought and oversold area for more extended periods.

The Flag pattern strategy will be of great help while trading cryptos as the markets tend to be trending most of the time. Furthermore, pairing the pattern with the stochastic oscillator and the double MA will enable you to filter out any false signals. As always, backtest the above strategies in a demo account until you are confident to use them in a live account.

Conclusion

We have exhaustively covered several trading strategies in this article. These cryptocurrency trading strategies are meant to make trading in cryptocurrencies easier for you. However, using the above strategies is not guaranteed to work at 100% efficiency all the time. To ensure that you get the best out of them, we advise you do the following:

Select strategies that are suitable to you

Not all of the strategies we have demonstrated above are suitable for everyone. You should, therefore, only select strategies that you are comfortable with and ones that suit your trading style in the short and long term.

Use a combination of strategies

Various strategies give different results. Since trading cryptocurrencies is relatively new, you should use a combination of different strategies. No single strategy will exhaustively cover the complexity of cryptocurrency trading. Therefore, different strategies will help you to capture the diversity of the cryptocurrency market. Using multiple strategies will help to ensure that you get to arrive at a consensus about the market trend hence making a more informed trading decision.

Do not be rigid

Just as any other financial market, trading cryptocurrencies is continuously evolving. Thus, trading strategies might break down at some point or become obsolete. Continued use of the said strategy will only result in more losses. Therefore, when you notice this happening, you should be flexible and adapt your trading style to the changes in the market or adopt a new trading style.

Conduct thorough backtesting

Backtesting involves applying your chosen trading strategies to the past price action. Using a demo account, you can conduct a simulation of your trading strategy using the historical price action of your desired cryptocurrency. The primary goal of doing this is to determine if the selected strategies will meet your desired expectations. Backtesting will give you a quantifiable assurance of how effective the strategies are. The results from such backtests will help to inform your future levels of 'take profit' and 'stop-loss' levels. Furthermore, backtesting will help you to identify the best combination of trading strategies that will yield the most profits.

Backtesting of your trading strategies also allows you to change the parameters of such strategies to the most optimal levels. More so, backtesting can be effective in revealing scenarios where a trading strategy breaks down. Should such scenarios occur in the future, you will be well equipped to deal with them or avoid them entirely.

Trade on a demo account

After you are satisfied with the results from your backtests, you should first apply the strategies to a demo account trading. Using a demo account will be useful especially if you are trading cryptocurrency CFDs. Trading with a demo account will help to confirm the results of the backtesting you conducted.

Conduct a thorough fundamental analysis

No matter how effective your trading strategies are, they will be useless if you implement them on worthless cryptocurrencies. Therefore, you should ensure that you are applying your trading strategies to a financially stable cryptocurrency. Reading through the whitepaper of your preferred cryptocurrencies will help you determine if they have adequate liquidity or if they fit your trading goals.

We sincerely hope that you found this guide informative. Some of the strategies mentioned above can be complicated and take a couple of trades to get a clear understanding. Therefore, it is recommended to bookmark this page and read them multiple times until you get a clear understanding.

Good luck!

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