Trend + Volatility In The Crypto MarketCryptohopper Newsletter
Bitcoin has been consolidating over the past week as its bullish uptrend has somewhat stalled. During a consolidation phase, it is harder to make a profit as moves are less volatile and are usually short-lived. This is even worse if you use a trend-following indicator; by the time your trend following indicator signals a buy, the market has already turned against you . As such, it is important to use a volatility indicator in order to filter out trades during a consolidation phase. This week we will thus look at how you could have used the Parabolic Sar (a trend-following indicator) and the Average Directional Movement (a volatility indicator) together in order to trade BTC.
Without further due let’s get into it!
Parabolic SAR
The Parabolic SAR is displayed by a series of dots underlying the market in an uptrend and overlaying it in a downtrend. This indicator is particularly useful when the market is trending as it will signal earlier than most other indicators and will continue following the price higher just like a trailing stop loss. However, when the market is ranging, the SAR will give out a lot of signals in a short period of time which are not profitable due to the low volatility.
As such, a volatility indicator is needed in order to filter out these signals. One such volatility indicator is the Average Directional Movement or ADX for short.
Average Directional Movement (ADX)
The ADX as previously mentioned is an indicator that measures the volatility of a market. If the volatility is low then the ADX will stay below 20. When the indicator is below 20 it suggests that the market is ranging and we should not take a trade. As such we should set the ADX to filter out signals and only trade when it is above 20 .
Our final strategy will thus be, to buy when the Parabolic SAR is showing an uptrend, and the ADX is showing increased volatility which confirms that we are actually in an uptrend. Both of these indicators are available at Cryptohopper, so join us today and take full advantage of automating them!
