Crypto trading based on technical indicators might seem overwhelming at first. There are hundreds (or thousands? I have never counted them) of indicators one can use. Even more complicated, endless strategies exist for using an indicator and assembling a strategy.
From my perspective and discussions with new traders, this is the number one reason why people a) don’t start with technical indicators or b) quit after a few days/weeks.
With this post, I want to introduce one of the most straightforward crypto trading strategies that lets you quickly dip your toe in the water of trading with technical indicators.
Indeed, it is not the most advanced strategy, but it can produce good results if used correctly.
A Word About Crypto Trading Strategy Complexity
Before we dive in, I quickly want to address a common misconception about crypto trading based on technical indicators: More isn’t always better. I would go for the opposite: less is better.
So what does this mean? You don’t need a strategy that contains ten different technical indicators. Analyses have shown that adding additional indicators does not increase the success rate after a certain threshold between 3 and 5 indicators.
I usually build crypto trading strategies incorporating 3 to 4 indicators.
Therefore, don’t get it wrong and try to build an ultra-complex strategy.
The Best Crypto Trading Strategy To Get Started With Technical Indicators
Alright, it’s go-time. Discuss one of the most straightforward but successful crypto trading strategies regarding technical indicators.
From my perspective, a straightforward strategy should meet the following criteria:
- Easy-to-understand indicators
- Easy-to-understand entry signals
- Easy-to-understand exit signals
Let’s go through each of the aspects.
Used Indicators
The strategy only requires three technical indicators: EMA, MACD, and ADX. If you are new to this, here’s a quick explanation of the indicators and what they tell you:
- Moving Average Convergence Divergence (MACD): The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. It is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. The result of this subtraction is the MACD line, and a 9-day EMA of the MACD, called the “signal line,” is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals.
- 200-Day Exponential Moving Average (EMA200): The EMA200 is a moving average with greater weight and significance on the most recent data points. It is especially popular in stock trading and is a critical indicator for long-term trends. When the price of an asset is above the EMA200, it’s generally considered to be in an uptrend; conversely, if the price is below the EMA200, it’s supposed to be in a downtrend.
- ADX (Average Directional Index): The ADX is a technical indicator used to quantify the strength of a trend. It is a part of the Directional Movement System and includes the ADX line, which is non-directional; it registers trend strength whether the price is trending up or down. The ADX is typically plotted along with two directional movement indicators, the +DI and -DI lines, which help determine the direction of the trend. An ADX value over 25 typically indicates a strong trend.
Entry Signal
Spotting an entry signal is more accessible than easy:
- In the first step, you check the EMA200 and derive the trade direction. If the current price of the crypto asset is below the EMA200, you only open short trades. You only open long trades if the current price is above the EMA200. Always remember: The trend is your friend! Don’t trade against the trend.
- As a second step, you wait for the MACD signal line to cross the MACD line. If you want to trade long, the signal line must cross the MACD line from the bottom to the top. If you’re going to open shorts, the signal line has to cross the MACD line from top to bottom. Easy.
- If such a crossover happens, you have to check the ADX. This is important because you only want to trade strong trends. Therefore, the ADX has to be above 30.
That’s it. If all three criteria are met, you are good to go and can open a trade. You are following the overall trend, using the current momentum, and trading a local solid trend. That’s all the ingredients you need for a successful trade.
Exit Signal
When it comes to the exit signals, you can have flexible approaches. However, make sure to define your exit strategy before you enter the trade.
Here are two options:
- Set fixed Stop-Loss/Take-Profit levels (e.g., 1% and 3%). Before executing your trade, you can backtest the best levels (CryptoKnowledge offers a straightforward feature to backtest your strategies).
- You can also use the MACD crossover as an exit signal. Accordingly, you close your trade with the next crossover.
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