Advanced Trading Strategies for Crypto Prop Traders

Trend Identification:

• Technical Indicators: Assess momentum with 14-period RSI. An RSI above 70 often suggests the potential for further continuation of strong trends, which is confirmed by MACD crossovers (bullish signal when the MACD line is above the signal line) and growth in the histogram above zero.

• Volume Analysis: Confirm breakout validity with spikes in volume using MT5’s Volume Profile. A 20 to 30 percent increase in volume over the 20-period average volume confirms conviction for the trend.

• Timeframes: Use 1-hour or 4-hour charts. This complies with prop firms’ restrictions against tick scalping. Daily charts aid in identifying the trend direction.

Entry Points:  

• Enter after a price breaks a significant resistance level, confirmed by a candlestick close above it on high volume. For example, if BTC/USD breaches $80,000, wait for a retest of $80,000 as support to minimize false breakouts.

• Use Fib retracement levels (38.2% or 50%) of the previous swing to identify pullbacks for lower-risk entries for better trade timing.  

Exit Strategy:  

Implement trailing stops of 1.5-2% below the current price to protect profits as the trend progresses. Alternatively, take profits at Fib extension levels (e.g. 161.8%).  

Exit on signs of trend momentum exhaustion like RSI divergence (price makes higher highs, RSI lower highs) or a bearish MACD crossover.  

Risk Management:  

Limit risk exposure to 1-2% of account balance per trade to stay within daily loss limits. This means a $100,000 account caps losses at $1,000-2,000 per trade.  

Spread risk from a downturn in a single asset by trading uncorrelated cryptos like BTC and Polkadot.

Example

On the 1st of December in 2024, with the release of an update from one of the major DeFi protocols, the  Ethereum (ETH/USD) price per token surged to $4,000 from $3,500. Reviewing the 4-hour time frame sheds light on the RSI showing levels of 74, MACD being bullish, and volume sitting 25% over the norm. After a pullback to the 50% Fibonacci level, you go long at $3,800, anticipating ETH to hit $4,200, risking 1% of a $100,000 account. Your stop-loss is set at $3,700, 2.6% below your entry. If ETH does indeed hit the target, your earnings sit at $400 per token. 

Why It Works for Prop Trading

Trading crypto on prop firm accounts makes sense, especially with volatility. News-based trading allowances further boost the practicality of prop firms. As a result of the market being open 24/7, trends can be monitored constantly and worked on, ensuring no missed opportunities that advanced charting tools such as MT5 offer.

Identifying Extremes

• Bollinger Bands: Touching or exceeding the upper/lower bands (±2 standard deviations from the 20-period moving average) on a 4-hour chart indicates overbought or oversold prices. 
• Stochastic Oscillator: Readings over 80 and under 20 show potential reversion. Look for confirmation using candlestick patterns like doji or engulfing for better results.
• Average True Range (ATR): The 14-period ATR can be used to gauge volatility and set dynamic stop-losses.  

Entry Points

• Open short positions on overbought assets when the Stochastic falls below 80 and price rejects the upper Bollinger Band. Long positions can be taken for oversold assets when the Stochastic exceeds 20.  
• Use significant support/resistance levels or volume spikes signaling trend exhaustion to confirm the trades.  

Exit Strategy  

• Target the 20-period moving average or the opposite Bollinger Band for profit-taking. For a short trade at the upper band, aim for the moving average.  
• Place a stop-loss of 1.5-2 ATR above/below the entry point to account for market volatility. Taking BTC as an example, if the ATR is $500, then a $750-$1,000 stop loss makes sense.  

Risk Management

• Limit risk to 0.5-1% per trade. With a $100,000 account, this caps losses at $500-$1,000 per trade. This helps maintain multiple positions.  
• Spread investments into ETH and XRP to prevent concentrated exposure since BTC and ETH tend to move together.  
• Maintain portfolio balance by keeping track of correlations between crypto pairs.

Example

On January 15, 2025, Cardano (ADA/USD) was trading at $0.65, with its Stochastic indicator sitting at 87, marking the upper Bollinger Band. Current ATR is $0.06, and the 20-period moving average is at $0.55. You’re short at $0.64, targeting $0.56 and setting a stop-loss at $0.70 (1x ATR). With a balance of $100,000 and risking $500 (0.5% of the total), you trade 8,333 ADA. Should ADA/USD return to $0.56, you would have gained $0.08 per ADA/USD short – a 200% return ($0.8) on risk ($0.4) and comfortably within drawdown limits. 

Why It Fits Prop Trading

Mean reversion aligns with prop firms’ swing trading allowances, accommodating news events and weekend holding. MT5’s precise indicators and low spreads ensure accurate execution, while diversified trades reduce risk, supporting consistent performance.