One of the simplest methods of trading cryptocurrencies involves the application of moving averages (MA). The basic premise is that if the price of an asset is above its running average for a certain number of days, it is considered a trade mark. When it falls below the moving average, the asset is sold and cash is held until the price exceeds the moving average in the upper direction.
The latest two-week newsletter from Cointelegraph Consulting looks at many ways in which moving averages can be adjusted to capture Bitcoin price fluctuations. Using Coin Metrics price information, this analysis is broken down into four parts. The first part uses trading methods for different simple moving averages (SMA) – ie. equal weight of all previous prices within the specified time window. The second part of this analysis looks at a specific form of moving average, the exponential moving average (EMA), as the importance of new periods increases exponentially.
The third part looks at methods that only trade when important momentum signs appear, namely the Golden Cross and the Death Cross. Finally, the rolling returns of different moving average strategies will be considered to assess which strategy was most successful.
Simple moving averages vs exponential moving averages
For the sampling period selected in the tables below, 50 and 100 day SMA methods are better than their EMA counterparts. However, choosing a 20 or 200 day EMA strategy yields better results compared to simple moving average strategies. It comes with the benefit that the maximum yield is significantly lower.
In general, it is not clear which type and length of moving average will yield the best results. As EMAs place more emphasis on recent market movements, they are more likely to issue trademarks sooner, although at the expense of some signals being incorrect.
Comparison based on different income points
Some of the methods described above seem to work. However, it is harder to beat the market than to follow simple timing techniques. Especially in the cattle market, many methods yield results simply because the general trend is positive. In more difficult times, many methods can not protect themselves from loss.
If one invested on the basis of these methods in January 2022, all the methods would have conquered the market. The 200-day MA policy would have indicated no investment at all, which would have yielded the best result. All other methods caused losses. The 50 day MA policy shows how false signals can lead to the destruction of valuables which can sometimes exceed the loss of a simple buy-and-hold policy.
“Two crosses” policy
In the field of technical analysis, traders often talk about the Golden Cross and the Death Cross. Both terms refer to the behavior of moving averages with each other. The most common version of the golden and dead cross is associated with the 50 day and 200 day MA. When the 50-day MA moves over the 200-day MA, this golden cross gives a sign of the expected bull market, but the death cross – i.e. 50-day MA moves below 200-day MA – often marks the beginning of a bearish period.
The policy that only looks at the golden cross and the death cross achieves general market development correctly. It comes in before significant upswings and stops when a severe downturn occurs. However, as this policy responds to larger market developments, it takes some time to exit the market and re-enter it. This can prevent large losses but can also lead to missed opportunities when the market changes direction.
Roll analysis
The above results show that methods based on moving averages are no cure for bear markets or market fluctuations. Since the starting point is important for the performance of such methods, different starting points should be considered.
The chart below shows what the return could have been by applying a specific policy for one year – ie. The return published before January 1, 2017 is the result of a policy that began on January 1, 2016.
The same analysis can be done by implementing each policy for two years instead of one. Although the differences between methods are sometimes greater compared to the analysis with a one-year yield above, a similar picture emerges where the 20-day MA policy yielded a more promising return in 2018 and 2019, while the 50-day MA policy yielded better results in 2021 and 2022. Yet in both analyzes, a simple buy-and-hold strategy can perform better for some time.
The growing return on policy implementation over three years is not too different physically from the two-year cross-analysis, but brings higher returns in the run-up to the markets, except for 2021. However, when all three time windows are compared, it becomes clear that the ranking of policy success can change with time. Although the 20-day MA policy has been dominant for several years (depending on the time frame of the rolling analysis), it has declined significantly in other years. The same can be said for other methods. Therefore, past returns are not a reliable forecast for the future performance of a particular policy.
Average out
Moving weight plans based on moving averages can provide some guidance for traders and can sometimes provide relevant information on general market trends. Nevertheless, they should be treated with caution as the length, type of moving average and starting point of analysis can give different results. Investors should evaluate the data used carefully and make sure that they can respond to any signal at the right time.
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Disclaimer: The views expressed in this entry are for general information only and are not intended to provide specific advice or recommendations for any individual or on specific securities or investment products.
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