Cryptocurrency markets are notoriously volatile, providing an abundance of opportunities for traders to take advantage of. However, increased volatility means greater risk. A disciplined trader will create a strategy that navigates the choppy crypto markets. This article reviews 3 popular crypto trading strategies (They should be encouraging of further research). Not only can these crypto trading strategies be tweaked to maximize profit, but they can be tested & automated very easily without any coding knowledge. The strategies discussed here are Range, Momentum, and Swing Trading.
Range Trading Using the RSI Indicator
Typically, cryptocurrencies will trade within a defined range. This range is characterized by support and resistance bands. Essentially, range trading allows the trader to buy and sell when an asset is overbought or oversold. Some of the common indicators used for this type of trading are the Relative Strength Index (RSI), Stochastic Oscillators, and Support and Resistance Bands. If you are using the RSI, it is fundamental to know that it measures the speed and change of price movements, oscillating between zero and 100. Usually, a value below 30 is considered oversold and a value of over 70 is considered overbought, which can be used to trigger a buy and sell signal, respectively (see figure 1 below).
Now that we have identified an indicator that could fit our strategy, we should identify a non-trending market (i.e., an asset that is trending horizontally) so that the strategy does not get in on a range that is really part of a larger trend. To do so, one can use a moving average indicator on the timescale being targeted. Alternatively, the Average Directional Index (ADX) can measure the strength of a trend without considering its direction. It is presented on a scale from 1 to 100, with an index lower than 20 often considered a horizontal trend. Another crucial step to setting up this strategy is identifying the range area. Typically, one would want the asset to have recovered from the support band and peaked at the resistance band at least twice. This further ensures that you are trading within a sideways range and not a larger trend.
As for the exit scenario, it would seem logical in the context of our indicator to hold the position up until the asset is considered overbought. Therefore, an exit strategy for the RSI indicator would close the position when the RSI rises above a certain index. It is considered good practice to place stop orders outside of the trading range, like a trailing take profit (TTP). Using TTP allows the trade to continue its trajectory so long as it is profitable for the trader. Whichever crypto trading strategy or indicator you use, it should be back-tested thoroughly while trying to avoid optimizing the strategy solely in historical terms (i.e., optimization bias).
Here is an example of how you can automate an RSI-based strategy using everyday English with Capitalise.ai:
Entry Strategy
Exit Strategy
Momentum Trading on Price Change with EMA and ADX
Momentum trading measures the strength of an asset’s current trend through different indicators, technical or otherwise, and buys an asset while the price is believed to still be rising. One would then sell at an assumed price peak or at profit. The rationale is rather simple. If there is a big enough force that is encouraging a price move, it will likely continue that way long enough to capitalise on. If you would like to learn more about the vast popularity and logic behind momentum trading, check out this fascinating research brief.
As one would expect, the primary task of momentum trading is to assess the strength of a trend before buying in. This assessment, and in turn, the entire strategy, rests on three fundamental metrics: trading volume, volatility, and timeframe. Some of the technical indicators commonly used for that assessment are the Average Directional Index (ADX), Moving Averages (MAs), Relative Strength Index (RSI), and Moving Average Convergence Divergence (MACD). This may at first seem overwhelming, but each indicator is simple when you drop the intimidating acronym. Here, we will focus only on two indicators to determine a momentous price change.
A popular momentum strategy considers an exponential moving average (EMA) and the ADX indicator. To enter a trade according to these technical indicators, one would wait until the ADX is at 30 or above, signaling a strong trend regardless of direction. Then, if the EMA is pointing upwards, it is also suggestive of a trend, a perfect storm of sorts. You can see these indicators in Figure 1 below.
A potential exit for a strategy like this could be to take profits when the price of the asset crosses the EMA, but the exit below will use a TTP instead. As mentioned above, the volume should be a key factor when deciding on an exit signal. A higher volume tends to mean that there is stronger momentum and therefore serves as a more accurate indicator to buy. When it comes to momentum trading, it is quite easy to put the strategy in simpler terms, as seen in the demonstrations below:
Entry Strategy
Exit Strategy
Swing Trading with Bollinger Bands
Swing trading is perhaps the most popular crypto trading strategy. The underlying principle is that the price movement of an asset is rarely ever linear for long (like a momentum strategy would assume). In other words, the purpose of swing trading is to take advantage of pullbacks and rallies in prices. Entries take place at the pullback and exits at the rally. These strategies can span multiple days or even weeks so long as there remains good reason to hold the position. Like all the other strategies mentioned above, this strategy can be based on any number of variations of technical and fundamental analysis.
There is one technical indicator that is heavily associated with swing trading, and it has been argued to be the only one needed for this kind of trading. That is Bollinger Bands (BB). When looking at a Bollinger Band, there will be three curves seen. The middle curve is a simple 20-day moving average (SMA). The upper and lower bands represent the standard deviation of the SMA, which is 2 standard deviations above and below. In other words, the two outer bands determine the volatility of the trend and serve as indicators for when a pullback or rally is taking place. When the price of an asset crosses the upper band, a sell signal may be in order. When the price moves below the lower band, a buy signal may be in order. A strategy does not need to incorporate both those conditions for the entry and exit, because the asset (and the Bollinger Band) may be in a general downward trend, as the following example demonstrates:
This example shows the backtest results of a strategy that enters a position when the asset crosses below the lower Bollinger-Band and closes the position at profit above 1%:
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