Forex Trading Strategy: Fibonacci Daily Strategy on Cryptocurrencies

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Cryptocurrencies are very volatile assets, capable of large intraday movements. With such large swings in price, trading them on an intraday basis brings on far greater risk than when trading forex or stocks. In order to trade them more safely and ensure that the best trading opportunities can be plucked out of the market, trading on the daily charts provides a viable alternative.

There are several reasons to trade on the daily charts.

  • The daily charts are a better representation of the overall trend of the cryptocurrency. You can hardly get any hint of the trend when using short term charts such as the 15-minute or hourly chart. Remember, the trend is the trader’s friend until it ends. So any trade you perform on a crypto asset should ideally follow the trend, and the daily chart helps you identify that trend quickly.
Daily chart of Neo/USD

Daily chart of NEO/USD

To buttress this, look at the two charts from the same asset (NEO) above. Which of the two charts shows the uptrend quite clearly?

  • Using daily charts means that you can spot opportunities fewer times, but with greater profit potential.
  • Daily charts easily help the trader spot true retracements, not a mere pullback on a short term chart that may just be market noise.
  • Using daily charts means that you spend less time trading and more time doing something else. The strategy that will be discussed is easy to setup. You can set up your entry triggers with desktop/push notifications on your computer or mobile devices so that you only set your entry and exit levels.

The Strategy

Now that the importance of the daily chart in crypto trading has been established, it is time to move on to the strategy, which is based on the use of the Fibonacci tools on the daily chart. The tools to be deployed are:

  1. Fibonacci retracement tool (for trade entry)
  2. Fibonacci Expansion tool (for trade exit point)
  3. Stochastics oscillator set to 10,3,3 (for entry trigger)

Basis for the Strategy

Markets usually trend for some time, before the traders who got in early take some profit. This is what causes price retracements, which is a period during where prices retreat from the trend highs as a result of profit-taking. Retracements are not a bad thing. The only thing bad about them is that many retail traders usually start taking positions on the trend just as the retracement commences. This action will naturally cause their positions to end in losses. Retracements are good re-entry points for traders who missed the initial ride. The challenge is that you have to know exactly when to get in and when to get out.

Also Read: Bitcoin Cryptocurrency Trading Strategies using Support and Resistance

This strategy aims to get the trader to enter the trade when the retracement is complete and price action is ready for another move in the direction of the initial trend. This works in the uptrend and downtrend.

Trade Setup and Entry

Open a daily chart for any cryptocurrency of your choice. Once you notice that the price has started to retrace after being in a trend (which could be up or down), do the following:

  • If the asset was in an uptrend, select the Fibonacci retracement tool, and apply it to the lowest price point on the chart that you can see within a 6-week range. Drag the tool to the highest price attained before the retracement. This action traces the 5 default Fibonacci levels of 23.6%, 38.2%, 50%, 61.8% and 100%. Most times, price will retrace to the 50% and 61.8% levels. Make a note of the prices at these levels.
  • Apply the Stochastics oscillator set to 10,3,3 on the charts. The Fibonacci level to which price retraces when the lines of the Stochastics cross themselves at an oversold level (i.e. <25) is the entry level for the trade.

Stochastics trading strategy cryptocurrencies

This chart is a real-life example which shows the retracement of Bitcoin after the Chinese government banned Initial Coin Offerings and Bitcoin exchange operations in the country. It led to a massive sell-off and provided a re-entry opportunity which the writer called on an online forum. The trace was made from the swing low (lowest point on the chart at the time) to the swing high (highest point on the chart at the time before retracement occurred). Prices retraced to the 61.8% level, but buyers quickly picked off from there and forced the daily candle in question (September 15,2017 candle) up from that point, showing clearly that the institutional investors were also watching that Fibonacci retracement level. The uptrend simply resumed from there and hit an incredible run that terminated at $19,500 in December 2017.

The trade would be setup as follows:

  • Market Buy at the 61.8% price level (if you are monitoring your charts) OR
  • Buy Limit at the 61.8% price level once price has gone below the 50% level and the Stochastics signal is yet to form.

Trade Exit

No one could have predicted where the renewed uptrend would end. So at the time of trade entry, use the Fibonacci expansion tool to get possible trade exit areas which would be set as Take Profit. This is done by performing the same trace as the Fibo retracement tool, but the trace is extended to the exact retracement level used for the price entry by pulling the shorter leg of the tool to that point. A correct trace would look like this:

Fibo retracement and Stochastics strategy

A correct trace would produce three expansion levels:

  • FE-61.8%
  • FE-100%
  • FE-161.8%

It is logical to use the FE-100 level as the 1st Take Profit point. If prices surpass this area, you can use a trailing stop to follow the price trend to the next Fibonacci expansion level (FE-161.8%).

NB: Most cryptocurrencies soared in 2017 and some are only just retracing. With no downtrend from the previous year to report on, no examples have been given. However, traders need to watch the situation on Bitcoin to see if it the current down retracement in its price is merely a retracement or a complete trend reversal. For other cryptocurrencies, use the strategy described above to pick out opportunities that currently exist in the market.


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