Trend is your friend! This is a phrase you'll find almost in any article about trends. We don't want to explain how important the trend concept is. If you are familiar with market analysis, you'll already know that it's a basic term used in the analysis of any level of difficulty. It's more relevant to consider trading strategies based on the trend approach. Let's discover the most effective ones.
A trend is an overall market direction for a certain period. There are three types of trends. An uptrend or a bullish trend is an upward market movement, a period when the asset's price rises. A downtrend or a bearish trend is a downward market movement, a period when the asset's price declines. A horizontal trend is a sideways market movement, a period when the asset's price doesn't change significantly.
Before we share some trend trading strategies, let's start with trend indicators. There is a group of trend indicators that help traders determine a trend's direction and its strength. It's not an exhaustive list of trend indicators, but we gathered the most effective ones. If you are experienced enough, you can try them and create your own trading strategies.
The Moving Average indicator is one of the most mentioned technical tools. You will find it in almost any article about trend trading. Moving Averages only provide signals on the upcoming trend direction in pairs. The most common pairs are combinations of 50-, 100- and 200-period MAs.
The rule is simple: when an MA with a shorter period crosses one with a longer period bottom-up, the price goes up. When an MA with a shorter period breaks below one with a bigger period, the price decreases. It looks simple.
However, there is one thing that is barely mentioned. Moving Averages provide short-term signals. A rise or decline may follow after the MAs signal them, but it's more likely there will be a price correction, not a real trend. It's vital to test various MAs on the chart to find the best pairs for long-term signals.
You might have already expected MACD to be the next on our list because MACD is built on Moving Averages. MACD, or Moving Average Convergence Divergence, provides more reliable trend signals. A strong signal is based on convergence/divergence between the indicator and the price chart.
When the price forms a higher high, and the indicator goes down, it's a bearish divergence. The market is expected to decline. When the price forms a lower low, but the MACD indicator doesn't follow the price and moves up, it's a bullish divergence. The price is expected to rise. Such signals work well on higher timeframes, providing alarms for longer-term investments.
The MACD indicator is often paired with the Relative Strength Index (RSI). To forecast the upcoming market direction, the RSI provides two signals. They are convergence/divergence and breakouts.
As for convergence/divergence, the signals are similar to those of the MACD indicator. When the price forms a higher high and the Index goes down, it's a sign of upcoming price depreciation. If the price forms a lower low and the RSI has a higher low, the crypto's rate is anticipated to increase. Convergence/divergence is one the most reliable signals.
However, the major RSI signal is a breakout of a certain level. When the Index leaves the area above the 70 level, it's a sign of an upcoming decline. If the Index breaks above the 30 level, the price is anticipated to increase.
Parabolic SAR is another trend direction indicator. It can be called the most straightforward analysis tool. During an uptrend, Parabolic SAR moves below the candlesticks. As soon as it forms three dots above them, it's a sign the trend is changing its direction. In a downtrend, the indicator is above candlesticks. As soon as it forms three dots below the candlesticks, it's a sign an uptrend is forming.
It's vital to find confirmation of any signal you get from the aforementioned indicators.
3 Efficient Trend Trading Strategies
You can find plenty of trend strategies. You can combine various indicators that define the trend and even create your own trend trading strategy. We have gathered the three most effective trading approaches that will help you trade in the trend and its change.
A counter-trend occurs within a major trend. It's a situation when the market moves in the opposite direction to the overall trend. A counter-trend exists for a short period. That's why in a counter-trend strategy, it's vital to catch the entry point as soon as possible.
Let's imagine there is a strong uptrend. Strong is the key word here. If you confuse a short-term price correction with a trend reversal, the strategy won't work.
A counter-trend can be determined by using oscillators such as the Stochastic Oscillator and RSI. Let's imagine the RSI crosses the 70 level bottom-up. It's a sign the cryptocurrency is already overbought. Thus, although the prevailing trend is strong, there is a risk the price will decline.
- A break below the 70 level will signal the price is falling. (1) It's an opportunity to open a sell position. Although it's important to enter the market as soon as possible not to miss a chance to make the most out of your trade, you shouldn't rush. Open trade at the second bearish candlestick formed after the market moved down. (2)
- A stop-loss order can be placed slightly above the reversal point. (3)
- Draw a trendline through trend bottoms. To close the sell position, you should wait until the price touches the trendline. (4) A trendline is one of the strongest levels that cause a price rebound.
To confirm the price reversal, you can use the same Stochastic Oscillator or find chart and candlestick patterns that signal that the price is anticipated to move in the opposite direction.
The strategy works both for up- and downtrends. It’s possible to profit from the counter-trend only if you trade cryptos for a short period. This strategy is inefficient for long-term investment because it applies to short-term price movements.
Trade in Trend
There are various trade-in-trend strategies. The one thing in common is that they all can be used for medium-term investments. A trendline pullback strategy is an option to trade a cryptocurrency within a trend. It’s a well-known rule that a trendline can be drawn through two points. However, if you want to ensure the trend is solid, finding at least four points is recommended.
To enter the market, you should find the fourth point through which you can draw a trendline. Let’s imagine we are trading in a bullish trend.
- Draw a trendline through three points.
- Lengthen the trendline so that you can get the fourth touch.
- Wait until the price rebounds from the trendline for the fourth time. (1)
- Find a confirmation either from an indicator (Stochastic Oscillator and RSI will work here, too) or candlestick patterns. (2)
- Enter the market on a pullback after the formation of the second bullish candlestick. (3)
- Place a stop-loss order below the previous low. (4)
- It’s possible to hold the open position until there is a confirmation of the trend end. You can use the MACD indicator's signal to predict the trend reversal. MACD may signal a trend reversal when the MACD line moves below the signal line. (5) The MACD tool provides delayed signals. Thus, the reversal signal is quite strong to close the position.
The strategy is effective for both bullish and bearish trends.
Aroon Indicator Strategy
The Aroon Indicator is used to define a trend and its strength. To use the Aroon Indicator strategy, it’s enough to know how to read its signals. The indicator consists of two lines that move within a range. These lines are Aroon-Up and Aroon-Down.
- When Aroon-Up breaks above the Aroon-Down, it’s a sign of a possible uptrend. Conversely, when the Aroon-Up falls below the Aroon-Down, there are odds a downtrend is starting.
- A start of an uptrend is confirmed when the Aroon-Up touches 100. A bullish trend is in progress when the Aroon-Up is between 70 and 100, while the Aroon-Down is between 0 and 30. The same rule applies to the downtrend. To confirm the beginning of the downtrend, the Aroon-Down should reach 100. A bearish trend prevails in the market, when the Aroon-Down is between 70 and 100, while the Aroon-Up moves within a 0-30 range.
If you know these rules, you can easily trade within the trend using the Aroon indicator.
Let’s consider a sample for an uptrend.
- Signaling a trend reversal, Aroon's lines cross some time after the trend reversed. It means the signal is quite strong to open a position. If the price rises and the Aroon-Up rises above the Aroon-Down, you can be sure an uptrend is in force. It's time to buy the crypto. (1)
- To place a stop-loss order, you can find a previous low. It will be a level to close the trade in case the market turns around. (2)
We should warn you that this point should be reconsidered in a highly volatile market. A formation of long shadows can cause the premature close of a position.
- You can maintain your position open until the market turns around. The only thing you should do is monitor the market not to miss a price reversal. Aroon indicator will help you again. There are two ways to exit the market.
The first one is to trade until the market loses its force. We mentioned above that an uptrend prevails in the market when Aroon-Up is between 70 and 100 and Aroon-Down is in the 0-30 range. As soon as the Aroon-Up line moves below the 70 level and the Aroon-Down line goes above the 30 level, you can close your position. (3) We should say that such indicator signals don’t warn about the end of the uptrend. They just signal the trend isn’t strong anymore.
The second way is to close the trade when the indicator confirms the market has turned. As soon as the Aroon-Down moves above the Aroon-Up, it's time to close the sell position. (4) Of course, every trader wants to take the maximum out of the successful position. However, as we mentioned above, the cross of the indicator's lines occurs with a slight delay. It means the position won't be closed exactly at the end of the uptrend. Still, the loss will make up a small part of potential profit.
This strategy can be simply applied to the uptrend. All you need to do is use the steps vice versa.
Although the aforementioned indicators and trading strategies are efficient, you can use them only to predict short- and medium-term price movements. To invest in cryptocurrencies in the long run, you should combine technical and fundamental analysis. Moreover, every strategy should be tested on various crypto assets and timeframes. It's recommended to change the settings of the used indicators to find more workable signals.