Automated strategies - market formations - part I

Table of contents

At Bitsgap, we’ve developed two automated trading strategies, Classic and Sbot, which are designed to buy cryptocurrencies at a lower price to sell it later at a higher price. As you look at any chart, you will find that a price always swings. This creates a tremendous amount of opportunities for automated algorithms to execute trades on your behalf.

The only question is: When is the best time to launch and close automated bots to achieve maximum returns?

In this article, we will cover two automated strategies for Bitsgap bots based on price pattern formations. You can try them out in a Bitsgap demo-mode, a risk-free trading simulator developed for strategy testing and optimization.

Rising channel

The first one, “Rising channel”, also known as a channel up the pattern, is based on a simple principle of the price swinging within support and resistance lines, following an uptrend. Market participants tend to form future price expectations based on what has happened in the past.

An angled up trend line, drawn across the lows as displayed on a chart, is a bullish support line because it defines the series of lower-low prices allowed to maintain the upward trend. An angled up resistance line represents the series of higher-high prices:

As an unspoken rule coined by the community of traders, both lines are said to be “sustainable” if the price touches the support and resistance lines at least 2-3 times.

According to the “Rising channel” pattern, traders are going long when the price successfully reverts from downfall to continue the rally. Below is a trading configuration you can implement:

Your strategy for the Rising channel formation

  1. Wait for the price to bounce off the support line.
  2. Enter the market as you spot 2 or 3 bullish candles (4-hours chart can be optimal).
  3. Set a wide sell-zone up to the resistance level.
  4. Set a narrow buy-zone down to the support level.
  5. Close the bot as soon as the price reaches resistance.
  6. Alternatively, enable a “Trailing Up” to follow the uptrend if the price breaches the resistance line.
  7. Set a stop-loss below the support line.
Tip: From the statistical point, longer time frame charts remove a large part of the “noise” that interferes with seeing the bigger picture. The weekly chart provides direction, while the daily chart, or even the 4-hours or hourly charts, are used for timing entries and exits.

Rectangle top

The second pattern is called “Rectangle top”. This pattern forms when the price of a cryptocurrency trades in a sideways range. The price fluctuates between the horizontal support and horizontal resistance lines. Such a price movement creates a “W” shape within a trading range.

Below is a trading configuration you can implement:

Your strategy for the Rectangle top formation

  1. Wait for the price to bounce off the support line or enter in the middle of a range.
  2. Set a 50% sell-zone up to the resistance level.
  3. Set a 50% buy-zone down to the support level.
  4. Close the bot as soon as the price reaches resistance.
  5. Alternatively, enable a “Trailing Up” to follow the uptrend if the price breaches the resistance line.
  6. Set a stop-loss below the support line

When you spot a “Rectangle top” pattern on a rising trend, like on the chart below, this brings more confidence that the price will eventually break the resistance line to establish a new higher-high. A trend is your friend, remember that!

In search for an optimal trading pattern

To conclude, “Rectangle top” and “Rising channel” patterns are not the only existing patterns you can use for entries and exits. There are over 42 patterns recognized at the market.

It is up to you to find optimal patterns for your trading style. Patterns are being divided into two camps: bullish and bearish. The solution is to look for bullish patterns on a confirmed uptrend.

To learn how to determine the strength of a trend or its reversal here is the article in our blog. Read about other strategies here.

Written by Dmitry Perepelkin