The cryptocurrency market is increasingly becoming more liquid allowing traders to use different strategies to predict the future direction of a cryptocurrency pair.
While the news is a long term driver of specific cryptocurrency pairs, there are several technical analysis techniques which will help you learn how to trade these markets, using an online trading tool. Here are four simple strategies that you can use to begin investing in cryptocurrency pairs.
‘The trend is your friend’ is a catchy saying and describes a scenario where prices move in a defined direction. The goal of a trend follower is to identify the trend and attempt to take advantage of the trend until it changes direction.
One of the best ways to identify a trend is to use a trend following technical analysis indicator. A moving average crossover strategy identifies a trend and can be used as a signal which helps you enter and exit trades.
A short term trend following moving average crossover signal would use a 5-day moving average and a 20-day moving average. When the 5-day moving average crossover moves above the 20-day moving average, a buy signal is created.
When a 5-day moving average crossover falls below the 20-day moving average, a sell signal is created. This strategy performs well when a cryptocurrency is trending, but will have a difficult time when the cryptocurrency is trading sideways.
Another good strategy uses momentum. One of the best momentum indicators for cryptocurrencies is the MACD (moving average convergence divergence) index.
The MACD generates a crossover buy signal when momentum is accelerating and a crossover sell signal when negative momentum is accelerating. The buy signal is created when the MACD line (the 12-day moving average minus the 26-day moving average) crosses above or below the MACD signal line (the 9-day moving average of the MACD line).
A third signal that also involves momentum is the MACD histogram. The histogram uses a calculation to represent the MACD in a histogram form. When the MACD histogram crosses below the zero-index level, a sell signal is generated. When the MACD histogram rises above the zero-index line, a buy signal is generated.
You can also evaluate the trajectory of the MACD histogram. When the trajectory is rising momentum is rising. When the trajectory of the histogram is falling negative momentum is accelerating.
A fourth strategy that you can use is one that combines momentum with mean reversion. Mean reversion will help you trade the cryptocurrency market when prices are moving sideways. The fast stochastic is an indicator that helps with determining if a price is overbought or oversold. The fast stochastic measures the recent trading range and generates an index.
The index is a range from 0-100. Levels below 20 are considered oversold. Levels above 80 are considered overbought. In addition, you can use the fast stochastic to determine momentum.
When the fast stochastic line crosses above the signal line a buy signal is created. By using these four trading tools, you can enhance your ability to trade the cryptocurrency market.