In the world of trading and investing, there are two different methods for speculating across all asset classes.
Speculators are divided into one of the following categories: fundamental analysis or technical analysis.
Let’s examine each category and consider how they can be used to develop crypto trading strategies that work.
Fundamental Analysis vs. Technical Analysis
Fundamental analysis is most widely used among stock market traders, particularly those who invest in individual stocks. This particular method focuses on the earnings per share (EPS), price-to-earnings (P/E) ratio, dividend yield, and debt-to-equity ratio.
The main objective of fundamental analysis is to determine the intrinsic value of the individual stock. If the price of the stock is trading below its intrinsic value, an investor may want to buy the stock.
Investors use fundamental analysis with other asset classes such as bonds, commodities, and alternative investments. Regardless of the asset class, the objective is always the same — to determine the intrinsic value of the underlying asset.
If the asset is trading below its intrinsic value, the investor would be inclined to buy the security based on the fact that it’s undervalued. This can be a foundation of day trading futures strategies.
Technical analysis uses a completely different method. It’s a trading approach designed to evaluate investment flows and trading opportunities by analyzing statistical trends.
These statistical trends are gathered from various trading activities, most notably price movement and volume.
Technical analysis makes no effort to determine intrinsic value. Instead, it focuses on patterns derived from price movements and charting tools. These tools are used to appraise the strength or weakness of the underlying security or asset class and determine the day trading strategies for cryptocurrency or other assets.
Although technical analysis can be used with any asset class, it is most widely used among currency and commodity traders. Why?
Because historical research suggests that currencies and commodities generate much better performance results when traders use trend-following tools commonly found in technical analysis to develop their day trading futures strategies.
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Cryptocurrencies Work Best With Technical Analysis
Although cryptocurrencies have only been in existence for 10 years, technical analysis has proven to generate good crypto trading strategies and a better trading experience versus fundamental analysis.
Given the dramatic price fluctuations within the crypto universe, it’s virtually impossible to accurately determine the intrinsic value of any cryptocurrency, including Bitcoin. Therefore, it’s impractical to apply fundamental analysis if the intrinsic value is unavailable. As a result, the best futures trading strategies for crypto incorporate technical indicators.
Cryptocurrencies behave in a similar manner to commodities and foreign currencies (forex). Therefore, using technical indicators is the best course of action.
While there are hundreds of different technical indicators, it can be rather difficult to select the best ones when developing your day trading cryptocurrency strategy. Some simply work better than others.
Let’s review a few of the indicators that have yielded decent results for trading cryptocurrencies. We’ll use Bitcoin in our examples, but keep in mind that the best crypto trading strategy advice can usually be used for any coin.
Pay Attention to Volume
Volume can provide several clues to the underlying strength or weakness of the market. It can give early warning signs concerning a possible change in trend.
That said, many traders don’t pay attention to volume when developing their crypto trading strategies. However, this is a mistake as the indicator provides a “snapshot” picture of how many traders are actually establishing positions at various price levels.
The best way to use this indicator to develop a day trading cryptocurrency strategy is to compare and contrast the daily volume on a big up day or a big down day. If a bullish breakout is not confirmed by record volume, it’s probably a false breakout.
Also, if a bearish breakout is not validated by record volume, the most likely outcome is a false breakout in this case as well.
Let’s take a look at a perfect example of a false breakout that occurred in March 2021.
As you can see in the chart above, a strong resistance level formed at $51,354 on February 24 from previous support. On March 2 at 20:00, BTC entered into a short bull run, in which it surged from $47,450 to $51,681 by March 3.
However, the volume was weak (3,240 BTC divided between four candlesticks). For comparison, users traded 10,748 coins while Bitcoin gained $3,615 between February 16 and 17.
As a result, this turned out to be a false breakout, with the BTC price rolling over to the downside, eliminating all the gains from the cryptocurrency’s bull run in the next few days.
However, those with great crypto trading strategies who followed the volume indicator on March 2 and 3 were able to cut their losses very quickly.
The volume indicator produced another signal on February 22. A sell signal occurred at $54,237 on the heavy daily volume of 17,000 BTC (users traded 3,563 BTC on the previous day).
Traders who identified the crypto trading signal and shorted BTC at $54,237 enjoyed a very profitable trade, in which the digital asset fell down to $45,309 until its price started to increase again. The volume indicator worked incredibly well on this particular trade.
A third signal occurred on March 13. The volume indicator initiated a sell signal at $61,153 as Bitcoin’s strong surge that day was not matched by record volume (only 6,188 BTC). Therefore, this trade resulted in a false breakout, which moved the cryptocurrency’s price down to $51,344 by March 25.
As you can see, volume is a very useful tool in the world of technical analysis. For that reason, you should always pay attention to volume when developing Bitcoin trading strategies as it has the potential to generate very profitable trades.
More importantly, it can identify false breakouts, which will allow you to cut your losses very quickly. For that reason, you should never ignore the volume of the asset you are planning to trade!
Basing Your Bitcoin Trading Strategies on Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum oscillator that fluctuates between 0 and 100, measuring the speed and change of price movements.
RSI is a fairly popular indicator that can be found on many financial websites and also in day trading strategies for cryptocurrency.
Typically, traders use RSI to determine if a market is overbought or oversold.
The general belief is that a market becomes overbought when RSI exceeds 70. Conversely, a market becomes oversold when RSI drops below 30.
That said, this particular strategy doesn’t work very well in the real world as markets can remain overbought or oversold for extended periods of time. As a result, RSI tends to generate many false signals.
Based on historical research, a more appropriate way to apply RSI is to use it as a confirmation indicator. For example, if Bitcoin is making a new high, RSI should also be making a new high in order to confirm the strength of Bitcoin’s breakout into new territory.
If Bitcoin is making a new low, RSI should also be making a new low to confirm the strength of the cryptocurrency’s breakout into new territory.
The chart above displays a bullish breakout on February 8, 2021 at $46,453. Since the RIS generated a new high along with the BTC price, it confirmed that the breakout is valid, which resulted in a move upward to $57,402 by February 21.
The same outcome occurred on January 6 at $36,843. After testing the resistance line a few times, Bitcoin generated a breakout.
And, like in the previous case, the RSI confirmed the breakout as it jumped to record highs. As a result, traders who placed an order at $36,843 could profit $4,460 as BTC surged to $41,303 before entering into a correction.
The RSI indicator works remarkably well at confirming bullish and bearish breakouts. Traders who have the discipline to follow this indicator will save money by ignoring the trades that are not validated by a new RSI breakout.
Don’t Ignore Money Flow
The Money Flow Index (MFI) is a momentum indicator that measures the inflow and outflow of money into a security over a specific period of time. It uses price and volume to calculate trading pressure.
Arguably, MFI is the surest way to determine the amount of money entering and leaving a particular security or market. And if you’re looking to develop the best crypto trading strategy, you can’t ignore MFI.
Similar to the RSI, the index fluctuates between 0 and 100. In terms of Bitcoin, the best way to apply MFI for great crypto trading strategies is to use it as a validation tool.
For example, if Bitcoin is making a new high, MFI should also be making a new high in order to confirm the strength of Bitcoin’s breakout into new territory.
On the other hand, if Bitcoin is making a new low, MFI should also be making a new low to confirm the strength of BTC’s breakout.
As you can see on the chart above, the MFI invalidated the bullish breakout on January 29, 2021 at 8:00. While Bitcoin surged by a whopping $5,000 that day, the MFI moved just above the levels it was standing eight hours ago.
On the other hand, the MFI did a great job at validating the bullish breakout on March 8. As soon as the BTC price broke through the resistance level, the MFI jumped 10 points while the cryptocurrency’s value surged from $51,000 to $61,218 between March 8 and 13.
True Range Breakout (TRABOS)
The true range breakout indicator (TRABOS) is designed to capture short-term price fluctuations across all asset classes. It generates several buy/sell signals in comparison to most other indicators.
For those who enjoy active crypto trading strategies, TRABOS will be very appealing to your aggressive style of trading. Furthermore, it can also be applied to day trading futures strategies; trading them daily also requires a certain amount of aggression.
The most attractive aspect of TRABOS is based on the fact that it rarely misses a big move. Why? Because trading signals are calculated on a daily basis. Therefore, the indicator is constantly searching for profitable trading opportunities. See below for more information.
Note: A sell signal was generated at $54,663 on February 22, 2021.
The trading rules for TRABOS are rather simple. You can find them below:
1.Calculate the true range (daily high minus daily low).
- Buy signal is the closing price plus the true range.
- Sell signal is the closing price minus the true range.
- If long, the profit target is the daily high on the day of entry.
- If long, the protective stop is the low on the day of entry.
- If short, the profit target is the daily low on the day of entry.
- If short, the protective stop is the high on the day of entry.
Based on the chart above, the TRABOS didn’t generate a signal on February 21.
However, traders could identify a sell signal on February 22 at $54,663. While the BTC price closed at $57,479 on the previous day, the true range was 2,816. For that reason, a bearish signal could be observed on the next day when the cryptocurrency’s value decreased below $54,663.
Putting a protective stop at $57,572, our profit target was the low on the day of entry, which is $47,426.
This turned out to be a very profitable trade because BTC experienced a substantial decline that day and the day after. As a result, we reached our profit target at $47,426 on February 23.
After the trade has been completed, simply calculate a new buy/sell signal for the next day. You can automatically calculate daily TRABOS by using the Average True Range (ATR) indicator and setting its length to 1.
TRABOS creates 2 to 3 trades per week. The key to success is to consistently take every trade for an extended period of time.
Since TRABOS generates a large number of buy/sell signals, it is an excellent indicator for traders on the Digitex Futures platform. As Digitex is 100% commission-free, it doesn’t hurt the profitability of traders by imposing fees on their positions (a 0.10% cost would take away 10% from margin traders using a 100x leverage).
For that reason, trading on Digitex will dramatically reduce the cost of trading for aggressive crypto trading strategies that incorporate indicators like TRABOS.
Crypto Trading Strategies – Wrapping It Up
While they are definitely useful, the four indicators listed in this article are certainly not perfect. However, when taken as a group, they provide an excellent approach to trading cryptocurrencies.
No matter whether cryptocurrencies are bullish or bearish, it’s certainly possible to trade crypto successfully amid any market conditions.
However, it requires patience, discipline, and a handful of reliable indicators. While it’s easy to pick the right indicators, the hard part is being patient, disciplined, and dedicated when leveraging your crypto trading strategies.
That said, developing the best futures trading strategies will take more than just knowledge of these indicators, but they’re a good place to start.
I’ve been trading commodities for three decades. In 2016, I began trading cryptocurrencies.
Throughout my trading career, I’ve used technical analysis 100% of the time and have found it to be integral to developing the best crypto trading strategy.
Based on my trading results, I’m convinced that certain price patterns are repetitive in nature. I believe in the notion that past trading activity and price movements are valuable indicators of future price direction.
I’m also convinced that technical analysis will generate superior results, particularly if the technical indicators are trend-following in nature.
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Digitex Futures writers and/or guest authors may or may not have a vested interest in the Digitex Futures project and/or other businesses mentioned throughout the site. None of the content on Digitex Futures is investment advice, nor is it a replacement for advice from a certified financial planner.