Three-phase momentum strategy for Bitcoin

Bitcoin and other cryptocurrencies are known for their high volatility, which makes them an attractive but also challenging target in the eyes of traders. Our strategy today focuses on a combination of trend and momentum indicators that are not commonly used, giving traders an edge in a dynamic market. The strategy is suitable for both short and medium-term trading.

Bitcoin has been breaking one new record after another since the beginning of December 2024, and it looks like its price will settle above the $100,000 level for some time. Although large institutional investors are increasingly considering investing in bitcoin, which could lead to a more stable development of its price, it is still a relatively volatile and specific asset where traders must expect uncertainty.

Indicators

In today's article we will look at a strategy that might be suitable for just such a volatile asset, and therefore consists of indicators that track not only the trend, but also the volatility and momentum of the price. At the same time, these are indicators that are not as widely used, which makes this strategy an even more interesting tool for those who want to try something unorthodox.

Choppiness Index (CHOP)

The Choppiness Index is an oscillator that measures whether the market is in consolidation or in a trend. As the name implies, the indicator shows whether the market is choppy, where it is moving sideways, or calmer, more balanced and showing a trend. Values close to 100 indicate consolidation (the market is moving sideways), while values close to 0 indicate a strong trend.

This indicator does not show us which direction the market will move, but it does show whether the market is in trend or not. It clearly indicates whether it is a good time to trade, minimizing the risk in situations where the market is going sideways.

Keltner Channels (KC)

Keltner Channels is an indicator that is, like Bollinger Bands, based on bands. These bands for KC are based on the exponential moving average (EMA) and the Average True Range (ATR) indicator. The EMA is usually set at 20 and the upper and lower bands are usually set as twice the ATR above and below the EMA. The bands at KC do not indicate an overbought and oversold market, but on the contrary, reaching the upper band is a bullish signal and reaching the lower band is a sell signal. The advantage of this indicator is identifying breakouts and extreme moves, which is ideal for volatile assets like bitcoin.

True Strength Index (TSI)

The TSI, like the RSI, is an oscillator that measures market momentum. However, unlike the RSI, it uses double smoothing, which makes it less susceptible to false signals. Values above zero indicate bullish momentum, values below zero bearish momentum. Its main advantage, therefore, is that it reliably detects momentum and trend changes.

Position entry rules

Identification of the market condition

Use the Choppiness Index to determine if the market is in a trend:

If CHOP is below the 38.1 level, the market is in a trend and needs to wait for a signal.

If CHOP is above the 61.8 level, the market is in consolidation and needs to wait for a breakout.

Signal generation

Long position

Price breaks the upper level of the Keltner Channel.

TSI crosses the zero line upwards.

Short position

Price breaks the lower level of the Keltner Channel.

TSI crosses the zero line to the downside.

Risk Management

Stop-loss

Place a Stop Loss below/above the middle line of the Keltner Channel or use 1.5× ATR.

Take-profit

We set the reward-to-risk ratio (RRR) at 2:1 or 3:1. An alternative is to exit the trade when the TSI reverses and crosses the signal line.

Example of a trade

On the one-hour chart of bitcoin (BTCUSD, H1) below, we see that the price has broken the lower level of the Keltner Channel, with CHOP below the 38.1 level, indicating that the market is trending. TSI is also below the zero level and is falling, meaning we see a good signal to enter a short position.

We will enter the position when the price falls below the green line with the downward arrow ($64,660). We set the Stop Loss just above the middle line of the Keltner Channel ($65,550, 890 points) and we set the Take Profit with an RRR of 3:1, i.e. at the price of $61,990 (2,670 points).

On the second chart we see that the price was indeed moving in an interesting trend and after a few hours it reached the TP we set. There was even a buffer and a possibility to reach a bigger TP, but we need to remember that greed may not pay off in trading and it is better to follow the predefined rules of money management.

Advantages of the strategy

Again, this is a fairly specific strategy that uses indicators that are not widely used among traders, but in a given combination can give fairly good signals.

• Clear rules for entry and exit.
• Combination of lesser known indicators minimizes crowded trades.
• Works well in volatile markets such as bitcoin.

Disadvantages of the strategy

Like any strategy, this three-phase strategy may not fit every type of trader.

• It may be less effective in long-term consolidations.
• Requires experience with multiple indicators at once. This is not a typical disadvantage, but the strategy may not be suitable for less experienced traders.

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