Bitcoin trading: Currency weighting methods with different moving averages

Bitcoin trading: Currency weighting methods with different moving averages – Mail Bonus

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.