Cryptocurrency trading continues to spark an increasing interest among regular traders and some of them believe that there are some special strategies that should be used for digital assets. That’s not the case, luckily, and we would like to prove it by showing two basic strategies that work well on cryptocurrencies.
If you already know how cryptocurrency works and you would like to learn some simple strategies to trade them, keep reading and analyze what we have to say. Don’t forget to test both strategies on a demo or a small live account trading, before you actually trade as you do regularly.
For the current material, we don’t want to get into technical indicators and instead we would like to show two setups without oscillators, moving averages or other stuff. There’s no need for this since price action can do all the work.
Price action is basically the movement of price over time and although some traders think naked charts don’t show anything, in reality, they do show a lot. The price movement actually communicates a lot about the underlying order flow, how the majority of market players are positioned, and which side (bears or bulls) are in control. If you would like to dig deeper into price action learning, there are tones of material online.
The breakout strategy
Breakout strategies are one of the most used by professional traders, simply because it is one that enables them to enter the market in the direction of the dominant order flow. There are many ways to trade breakouts, but since we’ve already emphasized that these strategies are simple, let’s get into an actual example from a chart.
We’ll use the BTCUSD price to show you how breakouts work. Looking above, we’ve drawn the $11,250 line on the chart, since it acted as support three times. The first time the price hit the support, the bounce had been significant, but the second and third had been very weak, suggesting the buyers were paying less attention to the level.
After three days of weak consolidation, the price headed impulsively lower towards the level and broke below it. What happened next? Bitcoin plunged $1,700 in less than two days. Several hints must be mentioned in order to use this setup accurately.
As you may have noticed, we’ve first talked about the price action context. We had a clear support area and a change in the way market participants were relating to it (buyers reacted weaker when the price hit the support).
Second of all, close to the breakout, we can see sellers had been gaining the upper hand since the candles closed close to the lows and there were no wicks as seen highlighted on the chart.
This setup can be traded in an aggressive or conservative way. Traders who want to get in at a better price could enter the market when they see the price action is already weakening. Conservative traders should wait for the breakout candle to close, enter the market and place their stop loss above a recent swing high.
The false breakout strategy
You should already know that the cryptocurrency market is not as liquid as other popular ones (forex, stocks, commodities) and this means there is less capital behind each price move, making it easier for counter-trend players to reserve the course. That’s also the reason why we would usually see choppiness in how the price performs, which could make the breakout strategy inefficient.
This leads us to the second strategy we want to talk about- the false breakout strategy. Let’s take a look at an example from the ETHUSD price, which took place in mid-September 2019.
As you can see, ETHUSD made a swing high ($178.3) on September 6th, followed by a brief selloff. Buyers resumed and managed to drive the price above the level, but what happened afterward is the interesting part. Three days of consolidation in a relatively-small range following the breakout above $178.3 should have communicated that buyers will defend the level successfully.
That did not happen and the price broke below the level, probably trapping sellers who jumped into the market. After a few candles below the level, the buyers resumed and drove the price impulsively higher. You can notice how choppy was the price around the level, which is something you’ll notice very often with most of the cryptocurrencies.
Risk management and conclusion
Although these setups can work consistently, don’t forget that risk management plays an important role. Risk a small percentage of your account, use stop losses, and always target for at least a 2:1 reward to risk ratio. There’s no way you could make money 100% of the time, which is why you must also learn to manage risk, not just the strategy.