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Technical analysis is a reliable assistant in cryptocurrency trading, without which it is impossible to do without. There are thousands of indicators, on the basis of which crypto-traders develop their own strategies.
Most of them can be difficult to understand for beginners. But there are also effective strategies that have gained popularity among novice traders because of their simplicity.In this article, we will talk about such strategies, which are not difficult to understand for a beginner, but they will help in trading.
How to use the indicators
Technical indicators reflect real market indicators and help identify key support/resistance levels, overbought/oversold, trend direction and much more.
With the help of indicators, crypto-traders can find optimal market entry points and receive signals to buy and sell cryptocurrencies with a certain accuracy.
Traders create their own strategies based on indicators. As a rule, indicators are combined for more accurate signals, so the trader can see a more complex picture of what is happening in the market. This eliminates unnecessary noise and allows for faster and better retrieval of necessary information.
As a rule, the terminals of crypto exchanges contain preset basic indicators that a trader can use in his trade, such as SMA (moving averages), MACD, Volume and others.
For example, there are 3 moving averages with different periods and a Volume indicator on Binance charts. MA indicators smooth out price fluctuations and calculate average price values, allowing to understand in which direction the trend is directed at the moment. The Volume indicator reflects the current market activity: how much the buyers (bulls) or sellers (bears) prevail.
Traders can add, remove and customize indicators according to their individual trading preferences. But for beginners, the standard settings will be sufficient – they are recommended by the creators of these indicators and are often used by professional traders. As you gain experience, you will learn how to customize the settings to your own needs. Next, we’ll look at popular trading strategies and explain how to use them in crypto trading.
#1. Scalping
Scalping is not the easiest strategy for novice crypto-traders, but with proper risk management it can bring good results. The essence of scalping is to make multiple trades throughout the day to make small profits of up to a few percent. However, cryptocurrencies are highly volatile assets and their price can change by 10% to 50% or more in a single day. But this carries higher risks for traders, especially newbies.
How to trade
This means that it is important for a trader to determine at least two key parameters: support/resistance levels and trend direction. With the help of support and resistance levels, a trader can determine at what moments it is best to open/close positions. When price bounces off the lower boundary, that’s a buy signal, and a bounce from the upper boundary is a sell signal.
Particular attention should be paid to the moving averages. MA crossings can indicate both local and global trend changes. The Volume indicator will additionally help shape the market picture and indicate bearish and bullish divergence. For example, if the indicator displays a red one, but it is green on the chart, it indicates that the strength of the bears is running out and the price is preparing for a breakout.
Which indicators to use
Since it is necessary to determine the trend direction and key support and resistance levels, trend indicators as well as volume and momentum indicators are suitable for trading:
- SMA;
- MACD;
- Parabolic SAR;
- RSI;
- Volume.
The trend can change at any time and it is impossible to predict it. Therefore, it is important to make sure that the trend indicators maintain their direction.
Hint. Binance and many other popular exchanges use charts from the popular Tradingview service. To add an indicator to a chart, click on it with the PCM and start typing the name of the indicator in the field. Then select the desired indicator in the list that appears.
#2. Trading by trend
Another popular strategy among novice traders is trend trading. In this case, it is necessary to determine in which direction the price is moving at a given moment in time. Trends can be local or global. Global trends are suitable for medium- and long-term trading.
How to understand that the trend is upward
During an uptrend, the price moves in a staircase in a narrow channel and may slightly go beyond its limits. And, as a rule, each local minimum is higher than the previous one. The same is true for local highs.
How to trade
So, when you’ve determined that the trend is directed upwards, you need to identify the key support and resistance levels – we’ll use them as a starting point. Accordingly, the support zone is suitable for opening long positions, and the resistance zone – for closing.
As you can see in the picture, the cryptocurrency price fluctuates in a narrow corridor. And the local lows and highs are higher than the previous ones (in the screenshot, the lows are marked with white horizontal lines).
In a downtrend, the signal to start trading will be a breakout of the resistance level. However, sometimes a breakout can turn out to be false. If price recoils quickly after a breakout and returns to its original position, it could indicate a false breakout. At this time, it would be better to wait for the trend to manifest itself clearly. We will discuss the strategy based on the breakout of levels in more detail in the next paragraph of the article.
Which indicators to use
Since the strategy under consideration involves trading by trend, it would be logical to use trend indicators:
- MA (SMA, EMA, etc.);
- Stochastic RSI;
- MACD.
#3. Breaking through resistance level
This strategy is used when a new trend has not yet formed, but a break in a key level may indicate a change. Over a period of time, the price can bounce from support and resistance levels for a long time.
But sooner or later the market forces are tipped in the other direction: the price cannot move only in one direction. When the exchange rate rises significantly, the buyers weaken and the bears actively enter the game. The opposite is also true.
How can you tell if a trend is about to change?
When approaching this point, the amplitude of the price begins to decrease, that is, the price is in a sideways movement or in a flat. The beginning of an uptrend can be indicated by a breakout of the resistance level. And before that the sellers “push” the price closer to the resistance level.
One of the characteristic signs of a trend change can be observed when the resistance level is almost unchanged and the support level is approaching it, closing the chart in the form of some sort of wedge. At a certain moment the resistance level is broken through and the price starts growing, indicating the emergence of a new uptrend. It is important that the price does not immediately roll back to the previous level – this phenomenon is called a false-break.
How to trade
There is no need to rush and open a position immediately after the price has broken above the resistance level. The condition must be met: the new formed support level must not be lower than the previous resistance level. In this case it is possible to open a long position, and then trade on the trend.
Which indicators to use
Again, trend indicators will do the trick here. But in addition to them, it is better to use momentum and volume indicators. The list of suitable indicators for the strategy on the breakout of key levels:
- MA (SMA, EMA, etc.);
- RSI;
- Parabolic SAR;
- Volume.
#4. Strategy on the MACD
MACD (Moving Average Convergence/Divergence) is one of the most popular and simple indicators in trading. Its ease of use is what has made this indicator so popular.
How to trade
The signal to buy the cryptocurrency will be the crossing of the fast and slow MA lines below the MACD zero level. At the same time, the fast moving average must cross the slow MA from the bottom upwards – this is what signals the price reversal to growth.
The signal to sell, respectively, will be a downward crossover of the slow MA. It is not necessary for this crossing to be above the MACD zero level.
Which indicators to use
As we wrote earlier, two basic indicators with standard settings are sufficient for this strategy:
- MA (part of the MACD);
- MACD.
#5. Cryptoarbitrage
Not all trading strategies may be based on indicators, although they may involve their use as an additional tool. During periods of high volatility in the crypto market, there is often a difference between quotes on different exchanges and in different trading pairs. The difference between quotes can reach 5% or more.
Types of cryptocurrency arbitrage
There are two main types of cryptoarbitration:
- Interchange;
- Intramural.
Interchange arbitrage works like this:
- You buy cryptocurrency on the first site at a lower price.
- Transfer coins to the second crypto exchange.
- You sell at a higher price.
You have to calculate withdrawal and exchange fees for the cryptocurrency. In addition, there are risks that cryptocurrency rates will change dramatically during a period of high volatility, and you will not only lose profits but also incur losses. This is especially true for cryptocurrencies such as Bitcoin and Ethereum: their blockchains have expensive and slow transactions that can take up to an hour or more. During this time, the exchange rate can change dramatically.
Intra-exchange arbitrage involves the use of an intermediate trading pair within an exchange. Rates in different pairs can also vary greatly. An example of intra-exchange arbitrage:
- Exchange BTC to ETH;
- Buying LTC for ETH;
- Selling LTC for BTC.
It turns out a kind of triangle. In this case the profit is made at the expense of the price spread. As a rule, the higher the liquidity, the lower the spread. But pairs like LTC/ETH or BTC/LTC are less liquid, so the spread can be much higher, which opens good opportunities for crypto arbitrage. But with lower liquidity, orders may take longer to execute, which is the main risk of intra-crypto arbitrage.
Tip. Rates on different crypto exchanges can be found on special aggregator services, such as CoinMarketCap or CryptoCompare.
Conclusion
This is just a part of the trading strategies that beginners use.
There are many equally popular trading strategies based on the Bollinger Band, Fibonacci levels, Parabolic SAR and other well-known indicators.
