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So you are creating your technical trading strategy and it seems to go okay, but suddenly a price drop and your strategy didn't work as expected? I have been there and I feel you.

After careful study, I have come up with a way to detect price dropping. Price dropping detection is important because you can change the behaviour of your strategy during this period.

What is Price Dropping?

To me, and therefore in this article, a Price dropping happens when in 24 hours a symbol has lost 5% or more of its price. Visually speaking, you will see a slop of 45 degrees or more like the above image.

crypto btc usdt on gateio

How to detect Price Dropping?

This is the interesting part. First some facts you have to know:

  • You never know when it will stop,
  • You never know how deep it will drop down, it could be 5% or it could be 40% or even more.

With this said, these are the criteria conditions I have come to:

  • Must have a sequence of at least two solid bars (for bear) or blank (for bull);
  • for bear slope: EMA(4, close) < EMA(9, close) < EMA(16, close),  and for bull slope: EMA(4, close) < EMA(9, close) < EMA(16, close);
  • ATR(14)t-1 < ATR(14)t0;
  • Closing price < BB(20, 2)'s lower band (for bear) or Closing price > BB(20, 2)'s upper band (for bull).

Let's verify it with this graph.

crypto xmr usdt on gateio with metrics  

How to know when the Dropping has finished?

As I have said, you never know, however, there is a way to protect you. You may use one of these approaches:

  • Evaluate when RSI(14) < 25 (for bear) or RSI(14) > 80 (for bull); and my favourite
  • increment and decrement the period of time you do your evaluations.

If you want to keep it simple, you can double-time it, but if you want to get more accuracy, you can use a statistical approach, by analyzing last year's price droppings, you can use a standard deviation and a simple rule as follows:

  • if consecutive bar (b) <= consecutive bar average (μ), then increment the time period,
  • otherwise, start decrementing by the same proportion.

When using a standard deviation approach, the μ (mean or average) has a special meaning: 50% of the consecutive price drops (b) are there. So, it is more likely that there will be another solid bar than a change of trend.

When the b reaches μ, the logic becomes different. Pretend, μ = 3, if b = 4, it becomes less likely that there is a b = 5 (5 solid bars in arrow). Meaning that a reversal may happen, so you may want to decrease your time-lapses to catch a trading opportunity.

I am not very concerned when this happens on a bull market, as you can sell as soon as the pricing reaches the minimum you require to make your minimum profit (according to your own strategy).

Good luck!

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