Bitcoin recently suffered a bear market. The sudden down move surprised many investors.
But there was no reason for them to be taken aback. A popular technical indicator warned of the sell-off before it happened.
Stochastics can help you profit from bitcoin. This popular momentum indicator is widely followed by individual investors and professional money managers.
As you can see at the bottom of the chart, this indicator uses two lines to show the direction of the trend. Signals are given when the lines cross.
Stochastics Trade Signal for Bitcoin
The formula for calculating stochastics sets a lower limit of zero. The upper bound of the indicator is 100.
Values below 20 are relatively rare, as are readings above 80. The horizontal gray lines show the 20 and 80 levels.
Trade signals tend to be more reliable when they occur in these extreme areas.
In this chart, the stochastics indicator provides a buy signal when the magenta line crosses above the blue line. When the blue line falls below the magenta line, the indicator gives a sell signal.
The most recent sell signal came before bitcoin sold off by more than 20%. The timeliness of this signal isn’t rare.
Stochastics Beats the Buy-and-Hold Approach
Several studies have shown that simple technical strategies like this one can beat buy-and-hold returns in crypto markets.
One major reason for outperformance is the fact that technical strategies generally avoid some of the large price declines that occur in downtrends.
Bargain hunters might think declines are buying opportunities. But they might find more success with simple technical rules. A moving average or a simple stochastics indicator could be a better way to trade the market.
Of course, there are many cryptocurrencies. A trader could apply this strategy to several of them. There are many variants such as delaying action to limit short-term trades, or using weekly charts.
Traders might consider cryptos to be a part of their portfolio, just like stocks.
Your Gateway to Crypto Fortunes
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Michael Carr, CMT, CFTe
Editor, One Trade