Technical Analysis for Crypto trading: Stochastics in Depth

Technical Analysis for Crypto trading: Stochastics in Depth


In this article I hope to educate you on how I use the stochastic indicator and what it is exactly.

If you have not seen my first post which summarizes all the indicators I use to track my crypto assets please check that out with this link. I am also looking forward to posting in depth posts about the other main indicators I use mentioned in that post soon.

I know a lot of people love to HODL but here I teach swing trading which will generally have you hold a position from a few weeks to a few months and try and save you from huge downtrends in the market.

 

What are Stochastics?

Stochastics are a measure of an assets closing price compared to its past price range. More importantly we use stochastics to judge if an asset is overbought (price is too high) or oversold (price is too low). Generally you should get into a position when it is oversold. Also, although I generally show Ether, this can be done for any coin such as Bitcoin, etc.

ETH chart with Stochastics

Here is a price chart of Ether with stochastics located at the top of this chart. The black line is the fast 10.4 daily stochastic and the red line is the slow 10.4.4 daily stochastic. 

 

How is it calculated?

Feel free to skip this part if you do not care about the math behind it but I believe its always important to know the math behind what we use.

To calculate the value of our stochastic indicator we need to know a few bits of information. I will make up a crypto with fake prices to make this easy.

Over a 10 day period the highest XYZ was traded at was $60 and the lowest was at $50 and the most recent price was $52. This is all we need to calculate the 10.1 daily stochastic.

The trading range of XYZ was $10 (60-50) and recent price minus the low is $2. 2/10 = 0.2 and 0.2 as a percent is 20. Now we are done and the 10.1 daily stochastic has the value of 20. 

What we use on the charts is the 10.4 daily stochastic and the 10.4.4 daily stochastic. How these differ from the 10.1 is simple. The ".4" in 10.4 means you average the value of the last 4 days of the 10.1 daily stochastic to get the 10.4 and to get the 10.4.4 you average the last 4 days of the 10.4 daily stochastic together, which makes the 10.4.4 "slower" than the 10.4 because with more numbers to average it is harder to move the value.

 

Get these charts for yourself

These charts I show on this blog are generated for free from stockcharts.com. These charts are fully customizable and have way more than just Bitcoin and Ether. To see the full list of cryptos that this site includes then see this link. If you want the exact chart that I use for Ether then feel free to use this link here. I am not sponsored by this site, it's just a decent free technical analysis site and if you find a better one to use then all the stuff I teach is still valid there.

 

Entry and Exit Points (how we use it)

My most used entry point with the stochastic indicator is a stochastic cross. This occurs when the fast 10.4 crosses above the slow 10.4.4 as long as both are below a value of ~60.

ETH chart with Stochastics

Taking a look again at ETH we can see that this occurred very recently on Sep 14. You see that the black line crosses above the red line which is an example of the entry point that could be used. The best example of this entry point being successful is Jul 20 where you can both see the cross occurring and the start of the monster run for ETH. Note when the stochastics are above 60 and cross that this entry point does not work. 

Stochastics do not provide a clear exit point but they can warn you if you are jumping in at a riskier time. When the value of the 10.4 is above 80 then it is riskier to get into the asset but it does not necessarily mean that the price has to go down soon. I would say it's best not to enter a position if the stochastics are above 80. The inverse is also true that when the 10.4 is below 20 then the price is said to be oversold which is generally a safer time to get in but always check the trend of the price.

There is also always the chance of a failed breakout where the stochastics cross creating an entry point but then very quickly cross back with the 10.4 below the 10.4.4. If this happens then it is recommended that you do not try and stick around and find out where the price could go. You can see a failed breakout occur around Jun 16 and to save your wealth you should deposit your ego and not hold through the downtrend. 

 
Wrap up

I'm glad you stuck around to get to the bottom here and I hope you learned something about how to use stochactics. Since this is an in depth post about stochastics if you have any questions please comment on this post and I'll do my best to answer.

I also use Bollinger Bands, Moving Averages, and the MACD to help me time my trades but to put them all on this post would be too much. I will be putting out in depth posts about how to use those soon so please stick around so you do not miss them.

*for possible legal reasons I will say that this is not financial advice and is to be seen as educational only*

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MichaelTheCryptoGuy
MichaelTheCryptoGuy

Trying to Educate others about crypto while learning for myself.


CryptoWealthBlog
CryptoWealthBlog

Teaching you how to use technical analysis to time the crypto market and how secure your financial future with crypto currency.

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