One of the simplest strategies for trading cryptocurrencies involves the application of a moving average (MA). The basic premise is that if the price of an asset is above the moving average for a certain number of days, it is considered a buy signal. Once it falls below its moving average, the asset is sold, and a cash position is held until the price crosses the moving average again in an upward direction.
The latest bi-weekly newsletter issue of Cointelegraph Consulting looks at a number of ways to tweak moving averages to capture fluctuations in the price of bitcoin. Using price data from Coin Metrics, this analysis is divided into four parts. The first part uses trading strategies for various simple moving averages (SMAs) – that is, equal weighting of all previous prices within a specified time window. The second part of this analysis looks at a specific form of moving average, the exponential moving average (EMA), where the weights of the most recent period move up sharply.
The third part looks at strategies that only trade once important momentum signals appear, namely the Golden Cross and the Death Cross. Finally, the rolling returns of various moving average strategies will be considered to determine which strategy was most successful.
Simple Moving Average vs Exponential Moving Average
For the sample periods chosen in the chart below, the 50- and 100-day SMA strategies outperform their EMA counterparts. However, choosing a 20- or 200-day EMA strategy produces better results than simple moving average strategies. This comes with the added benefit that the maximum drop is quite low.
In general, it is not clear which type and length of moving averages will give the best results. As EMAs place more weight on recent market moves, they are more likely to provide a trading signal first, although some signals are priced incorrectly.
Comparison based on different entry points
Some of the strategies described above seem to be successful. However, beating the market is more difficult than following simple timing strategies. Especially in a bull market, many strategies give results simply because the general trend is positive. In more difficult times, not many strategies can protect against taking losses.
If one had invested based on these strategies in January 2022, all the strategies would have outperformed the market. The 200-day MA strategy would have indicated no investment at all, which would have yielded the best results. All other strategies generated losses. The 50-day MA strategy explains how false signals can cause price destruction that can at times exceed the losses caused by a simple buy-and-hold strategy.
“Two Crosses” Strategy
In the field of technical analysis, traders often talk about the golden cross and the death cross. Both the terms refer to the behavior of the moving averages interchangeably. The most common versions of the Golden and Death cross relate to the 50-day and 200-day MAs. Once the 50-day MA moves above the 200-day MA, this golden cross signals an upcoming bull market, while a death cross – that is, a 50-day MA moving below the 200-day MA – often Marks the beginning of a recession. Duration.
The strategy that only considers a golden cross and a death cross is a general market trend correction. It enters before a significant uptrend and exits when a severe bearish trend occurs. However, as this strategy reacts to larger market trends, it takes some time to exit the market and re-enter it. This can protect against huge losses, but there can also be some missed opportunities when the market changes direction.
rolling analysis
The above results suggest that a strategy based on moving averages is not a panacea for bear markets or market volatility. Since the entry point matters to the performance of such strategies, there are various starting points to be looked at.
The chart below shows what returns could have been achieved by implementing the given strategy for one year – i.e. the returns displayed for January 1, 2017 are the result of the strategy started on January 1, 2016.
The same analysis can be done by executing each strategy for two years instead of one. While the differences between strategies are at times wider than the analysis with one-year returns, a similar picture emerges as the 20-day MA strategy delivered promising returns in 2018 and 2019, while the 50-day MA strategy delivered promising returns in 2021. performed better. 2022. Yet in both analyses, a simple buy and hold strategy may outperform for some time.
The rolling returns of executing a strategy for three years are not qualitatively much different from the rolling analysis of two years, but come with higher returns in the market run-up, except for the one in 2021. However, when comparing all three time windows, it becomes clear that the order of success of the strategy can change over time. While the 20-day MA strategy has been effective for some years (based on the time frame of the rolling analysis), in other years it has underperformed. The same can be said of other strategies. Therefore, past returns are not a reliable predictor of the future success of a particular strategy.
average out
Momentum strategies based on moving averages can provide some guidance for traders and can sometimes provide relevant information about general market trends. Nevertheless, they should be considered with caution because the length, type of moving average, and starting point of the analysis can give different results. Investors should carefully evaluate the data used and ensure that they are able to react in a timely manner to any signals.
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Disclaimer: The opinions expressed in the post are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or any specific security or investment product.