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Bitcoin Technical Analysis: High Probability Trade Setups for Crypto Trading (Momentum vs Mean Reversion Strategies)

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Bitcoin Technical Analysis: Trade Setups

In this article, we share some high probability trade setups for both types by combining everything that we have learnt about candlestick patterns, chart patterns, indicators and more covered in our crypto trading guide.

There are mainly two types of trading strategies, momentum strategies for trading breakouts and trends, and mean reversion strategies for ranging markets.

Momentum Trading Setups

Momentum trading setups are useful when a market is trending. In momentum trading, you typically want to “buy high and sell higher”. But how does one determine the trend? And once you have identified the trend, how do you take advantage of the market volatility? Here are some trend trading setups that can be used to answer both questions.

Golden/Death Cross

A golden cross happens when the shorter moving average (e.g. 50MA) crosses above the larger moving average (e.g. 200MA). When the cross goes in the opposite direction, it is called a death cross.

A golden cross and death cross provides confirmation of a trend reversal, and is more reliable on higher timeframes such as a daily chart. For entries and exits, it is recommended to use a lower timeframe to determine them, or in combination with other setups.

You may choose to use the golden or death cross as a trade signal, but it can also work as a trend filter so that you can identify the trend and trade on the right side of the market. This means that in an uptrend, you’ll look to long only, and in a downtrend you’ll look to short only.

Accumulation Breakouts

Identifying accumulation phases, characterized by long sideways after a downtrend, and then buying the breakouts is one of my favourite trade setups in the cryptocurrency markets.

If you were here in 2017, you would have probably heard of Verge (XVG) that went from less than 10 satoshis (actually even 1 satoshi at some point) to 2000 satoshis in a span of 7 months.

Nobody could have guessed that it would go up a couple of 100x when it first started its rally, but did you know that the market was in accumulation for about 1 year? XVG was range-bound under 7 satoshis before finally breaking and closing above the range resistance. When such breakouts occur, it signals the start of an uptrend, and usually the longer the accumulation period the stronger the trend.

In identifying such accumulation zones, it is important to consider the situation and trend of the macro environment, so you can more easily differentiate it from a distribution or continuation of a downtrend.

When price breaks out of the accumulation zone range high, you can enter either on the confirmed close of the breakout candle, or wait for a throwback into previous resistance.

Confluence of Price, Volume, and Open Interest

This is a great example by @MustStopMurad about using a confluence of price, volume, and open interest to confirm a breakout and the start of a strong trending market. Since his twitter post on the 13th of January 2020, Bitcoin’s price has increased 28% from ~$8,200 to the recent $10,500 peak.

Bollinger Band Squeeze

When the bollinger bands contract, it represents falling volatility and when the bands expand, they represent rising volatility. The rationale behind a bollinger band squeeze strategy is that periods of low volatility are followed by strong trending breakouts.

How to identify and trade this setup?

  1. Identify areas of consolidation identified by the squeeze or contraction of the bands
  2. Mark out the highs and lows of the range within the squeeze
  3. Enter on a confirmed breakout of the range coinciding with expansion of the bands
  4. Exit strategies may vary, explained in the next paragraph

The example below is only one way of trading this setup. Depending on your trading style, you may opt for an aggressive or conservative entry and use only the bands, or complement this system with additional validation indicators such as oscillators to gauge the momentum of the market. While your exits can be using a cross and close below the outer or middle band as shown in the image below, or with a combination of other indicators, or using a trailing stop.

Ichimoku Cloud Setups

  1. Cloud – Kijun Sen trading strategy

In this strategy, we enter the market when the price breaks out of the cloud, and closes above the cloud. This signals a new uptrend, and we will enter in the direction of the breakout in an attempt to catch the trend. We use a high timeframe (weekly) to reduce noise of fakeouts.

Our exit is signalled by price crossing the Kijun Sen (red) and closes below it.

We can see that the Kijun Sen (red) acted as a support throughout a majority of the trend, however by using this aggressive exit strategy, we would have been faked-out twice.

  1. Cloud – Chinoku Span – Tenkan Sen trading strategy

In this strategy, we use the same entry signal as the example before, when the price crosses the cloud and closes above it.

However, this time we use a more conservative exit signal, which is when the lagging green Chinoku Span crosses below the blue Tenkan Sen. Although the exit signal came much later (about 4 months compared to the previous example), we were able to ride out a large majority of the trend without getting faked-out even once.

Mean Reversion Trading Setups

In a sideways market, range trading setups work best. Typically you want to buy at support and sell at resistance, the good old “buy low, sell high”. Although the crypto markets are largely trending markets, ranges are also useful in periods of accumulation and distribution, and sideways consolidation zones between trends, as well as for identifying strong support and resistance zones. 

Ranges are an important part of understanding Market Structure. In this section, we learn how to identify a range, and share some setups that work well in such environments.

Identifying a Trading Range

After a strong impulsive move in a trending market, we want to look for the first high in an uptrend (or low in a downtrend) and mark it out as the range high (low), and the first low (high) after a bounce as the range low (high).

High timeframe ranges are useful for determining strong resistance and support areas. This can be seen in the XBT/USD example below where an old (2018) range provided strong resistance and formed the 2019 peak.

Trading within a Range

After identifying a range, the best thing to do is to “buy low, sell high”. Generally, you want to buy when price reaches the bottom of the range, and sell at the top of the range.

As time goes on, prices coil up within the range, and volatility diminishes over time. Hence, it is common to see the first time price returns to the range high or low get rejected strongly. This provides high probability setups for selling the first bounce to the top of range, and buying the first bounce to the bottom of range. They also provide a relatively low risk trade as your stop will be just above the range high (or below the range low).

When price is in the top half of the range, you can say that bulls are in control, and if price is in the bottom half that bears are in control. When prices reach the mid range, you may want to look for buys above the mid range, and look for sells below the mid range.

Finally, after determining the range, you can look for trade opportunities on lower timeframes that are in confluence with your high timeframe bias. 

Trading Range Deviations

Another high probability setup in range trading is looking for deviations to the range, where the range low or high is swept and it closes back within the range, forming a swing failure pattern.

For range deviations in Bitcoin, it is generally “safer” to trade only the first deviations where it is more common to have fake breakouts (fakeouts). As time goes on, the probability of a breakout out of range into a trending market increases.

In this example, we look for confluence with other tools such as the Chuvashov’s Fork to supplement the strategy.

Trading Range Breakouts

As more time is spent in the range, the directional bias of the market becomes clearer. 

In the example below, range support was tested multiple times – a sign of weakness. Secondly, the range was formed during a downtrend, and there is a higher probability of a continuation. Thirdly, the descending triangle is bearish and shows that sellers are able to push prices lower with each subsequent bounce and that buyers are losing steam.

To confirm a breakout from range, it is best used when found to be in confluence with other factors. In this case, the confluence of environmental factors (the continuation of a downtrend) and chart patterns (descending triangle) to confirm the range breakout into a trending market was a strong signal to sell as soon as the weekly candle closed below the range.

Conclusion

Depending on the market condition, you may choose to adopt a momentum trading strategy for trending markets, or a mean-reversion strategy for ranging markets. To become a successful crypto trader, it is important to add a few high probability trade setups to your arsenal, and to follow your trading plan as you execute it.

To learn more about cryptocurrency market analysis, including fundamental and technical analysis, check out our complete guide to how to trade crypto.


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