Should I chase the rise if the deviation rate is too large but the trend is strong?

Understanding the Deviation Rate in Cryptocurrency Trading

The deviation rate is a technical indicator that measures the difference between an asset’s current price and its moving average, typically expressed as a percentage. In the context of cryptocurrency, this metric helps traders assess whether a digital asset is overbought or oversold. A large positive deviation rate suggests that the price is significantly above its moving average, potentially indicating overbought conditions. This often raises concerns about a possible pullback or correction. However, when the trend remains strong, many traders face the dilemma of whether to chase the rise despite the stretched deviation.

It’s essential to recognize that deviation rate thresholds vary across different cryptocurrencies and timeframes. For example, a deviation of +15% on Bitcoin’s 50-day moving average might be extreme, while the same level on a more volatile altcoin like Solana or Dogecoin might be common during bullish momentum. Therefore, evaluating the deviation rate must always be done in context. Relying solely on this indicator without considering volume, market sentiment, and broader trend strength can lead to premature counter-trend entries.

Assessing Trend Strength Alongside Deviation

When the trend is strong, characterized by consecutive higher highs and higher lows, increasing trading volume, and supportive moving averages (such as the 50-day and 200-day MA trending upward), a large deviation rate may not signal an imminent reversal. In fact, in strong bull markets, prices can remain overextended for extended periods. This phenomenon is often referred to as 'the trend is your friend' in trading circles.

To evaluate trend strength, consider the following factors:

• Price structure: Are recent candles consistently closing near their highs with minimal wicks?
• Volume profile: Is volume expanding on upward moves and contracting during minor pullbacks?
• Moving average alignment: Are shorter-term MAs above longer-term ones, indicating bullish momentum?
• Market dominance and sentiment: Is there growing institutional interest or positive news flow supporting the trend?

If all these elements align, a high deviation rate may simply reflect strong buying pressure rather than exhaustion. In such cases, chasing the rise—entering long positions despite elevated levels—can be justified, especially if risk management protocols are in place.

Risk Management When Chasing Extended Moves

Entering a trade when the deviation rate is high requires strict risk control. The primary danger lies in catching a falling knife if the trend reverses suddenly. To mitigate this, traders should never allocate full capital to such entries. Instead, consider the following steps:

• Use partial position sizing: Allocate only a fraction of your intended investment to reduce exposure.
• Set tight stop-loss orders: Place stops just below key support levels or recent swing lows to limit downside.
• Avoid emotional trading: Do not increase position size due to FOMO (fear of missing out), even if the asset continues to rise.
• Scale in gradually: Add to positions only if the trend persists and new confirmations emerge, such as bullish candlestick patterns or breakout retests.

Additionally, using trailing stop-loss mechanisms on exchanges like Binance or Bybit can help lock in profits while allowing room for further upside. For example, setting a 10% trailing stop ensures that if the price drops 10% from its peak, the position is automatically exited.

Using Confirmation Indicators to Validate Momentum

Before chasing a strong trend with a high deviation rate, it’s wise to cross-verify with other technical tools. These indicators help distinguish between healthy momentum and exhaustion:

• Relative Strength Index (RSI): An RSI above 70 typically indicates overbought conditions, but in strong trends, it can remain elevated. Look for bullish divergences or failure swings to time exits.
• MACD (Moving Average Convergence Divergence): A rising MACD line and positive histogram confirm ongoing momentum. Watch for bearish crossovers as potential reversal signals.
• Volume-Weighted Average Price (VWAP): If price stays above VWAP on higher timeframes, it supports the continuation of the uptrend.
• On-Balance Volume (OBV): Increasing OBV during price advances shows accumulation, reinforcing bullish sentiment.

Combining these with the deviation rate offers a more holistic view. For instance, if RSI is above 70 but MACD is still rising and OBV is making new highs, the overbought signal may be premature.

Practical Steps for Executing a Chase Entry

If you decide to chase the rise despite a large deviation rate, follow this detailed procedure:

• Select the correct timeframe: Use the 4-hour or daily chart to confirm the primary trend and avoid noise from lower intervals.
• Identify key resistance levels: Use Fibonacci extensions or prior swing highs to anticipate where price might stall.
• Wait for a minor pullback or consolidation: Instead of buying the highest high, wait for a small retraction to the 20-period EMA or a bullish candlestick pattern like a hammer or engulfing bar.
• Place a limit order slightly above the entry candle: This ensures execution only if momentum resumes.
• Set take-profit levels: Use Fibonacci extension levels (1.618, 2.618) or measured moves based on prior impulse waves.
• Monitor for reversal signals: Watch for long upper wicks, bearish engulfing patterns, or divergence on momentum indicators.

Exchanges like Coinbase Pro or Kraken allow advanced order types, including OCO (One Cancels the Other) orders, which let you set both take-profit and stop-loss simultaneously.

Psychological and Behavioral Considerations

Trading against the instinct to avoid overextended assets requires mental discipline. Many traders hesitate to enter because a high deviation rate feels 'risky,' but in trending markets, what feels risky can be rational. The key is distinguishing between fear-based hesitation and legitimate technical caution.

Maintain a trading journal to record your rationale for each chase entry. Note the deviation rate, trend strength indicators, and outcome. Over time, this builds confidence in your strategy and reduces emotional interference. Avoid comparing your performance to others who entered earlier—timing the very bottom is nearly impossible, and participating in a strong trend is often more profitable than perfect entry timing.

Frequently Asked Questions

Can the deviation rate stay high during a sustained bull run?Yes, in strong bullish markets, the deviation rate can remain elevated for weeks or even months. This is common in parabolic moves, such as those seen in Bitcoin during 2017 or 2021. As long as volume and momentum support the trend, the deviation does not automatically mean a reversal is imminent.

How do I calculate the deviation rate manually?Subtract the moving average (e.g., 20-day SMA) from the current price, divide the result by the moving average, then multiply by 100. For example: ((Current Price - 20-day SMA) / 20-day SMA) × 100. A result of +12% means the price is 12% above its 20-day average.

Should I use leverage when chasing a high-deviation trend?No, leveraging in overextended conditions increases risk significantly. Even strong trends can experience sharp corrections. Using margin amplifies losses during such pullbacks, potentially leading to liquidation. Trade with spot funds or minimal leverage if absolutely necessary.

Is it better to wait for a pullback instead of chasing?Waiting for a pullback reduces risk but may result in missed opportunities in fast-moving markets. Some assets never retrace significantly during strong trends. A balanced approach is to monitor for micro-pullbacks or use limit orders near dynamic supports like the 10-day EMA to enter with better timing.