Exploring a Simple Trading System for Multiple Cryptocurrencies
In this article, we’re developing a straightforward trading approach that can be adapted for various cryptocurrencies with fascinating outcomes. The system we will examine utilizes the Average True Range (ATR) as a measure of volatility, particularly when applied to Bitcoin (BTC). Recently, Bitcoin has garnered significant attention, both due to anticipation for a notable rally following the recent Halving event and its increasing importance as a strategic asset for preserving value against inflation often associated with fiat currencies.
Understanding the Average True Range (ATR) Indicator 📈
The Average True Range (ATR) is a technical tool designed to assess the volatility of an asset over a defined timeframe. It was introduced by Welles Wilder Jr. in 1978, a prominent analyst in the commodities sphere. The primary purpose of the ATR is to offer a quantitative measure of an instrument’s or market’s volatility.
A rising ATR typically signals high volatility in the market, while a lower ATR points towards greater price stability and a diminished risk profile.
This indicator reflects the fluctuations in price over a specified duration, but it does not indicate the market’s direction or momentum.
To compute the ATR, it is necessary to find the average of what is termed the “true range.” This differs from the basic “range” (i.e., the highest price minus the lowest price of a bar) by factoring in price gaps compared to the preceding bar’s closing price.
Generally, the ATR is calculated over a standard period of 14, but traders can adjust this timeframe to suit their strategies.
Executing a Trend-Following Strategy on Bitcoin: Overview and Market Testing 🚀
The discussed strategy is an elementary upward trend following method intended for the spot market, although it is applicable to futures as well. The approach involves entering the market with a stop order when a specific price threshold is broken, under the premise that the price movement will continue its upward trajectory.
The trading session is conventionally set from 00:00 GMT to 23:59 GMT. Since cryptocurrencies are traded continuously over a 24-hour cycle, these times reflect a full solar day. To facilitate precise trading, a 15-minute time frame for bars will be used, supplemented by a second data series (data2) utilizing daily bars to determine the entry level.
This entry point is calculated by taking the closing of the final daily bar and adding a specified amount, derived from the Average True Range (ATR) over the last five days (period), multiplied by a preset factor (initially set to 1).
place a buy order on the next bar at data2 + factor*AvgTrueRange(period)data2 stop;
If assuming operations of $10,000 per trade, the trade will close when reaching a stop loss of $1,000, a relatively substantial amount deemed necessary in this volatile market. Given Bitcoin’s erratic price movements, the strategy is designed for intraday trading; thus, positions will be closed by the end of each session without needing to set a take profit level.
Applying this method to the Bitcoin spot market (BTC) against USDT (a stablecoin pegged to the U.S. dollar), from January 2017 to October 2024, has yielded promising outcomes, with a notably stable growth trajectory for the equity line.
Enhancing the Performance of the Bitcoin Trend-Following Strategy 🛠️
To optimize the strategy’s performance, various parameters can be modified, including the period used for calculating the ATR, the multiplicative factor, and the stop loss amount.
Adjusting the ‘period’ between 2 to 10 days and changing the ‘factor’ from 0.5 to 2 (in increments of 0.25) while keeping the stop loss constant can produce the results displayed in the analysis.
When arranged by average trade, the combination of ‘period’ set to 2 and ‘factor’ at 1 yields an excellent net profit to drawdown ratio (Custom Criteria) alongside the best net profit, totaling approximately $29,600 among combinations with considerable average trades. While there are options with greater net profits, their associated average trades are too minimal to be practically significant.
With the established parameters, the cumulative profit of the strategy nears $30,000 across 355 trades, with an average trade yielding about $83.50. These findings indicate a reasonably effective strategy suitable for live trading, signaling its potential for further enhancements.
Applying the Trend-Following Strategy to Other Cryptocurrencies 🌐
Without delving deeply into operational filters that could result in overfitting while optimizing the strategy, it’s beneficial to examine its application to other cryptocurrencies to assess if it can yield favorable results. Bitcoin, known to influence the entire market, often causes other cryptocurrencies to exhibit similar movement patterns.
The equity progression of this approach applied to Ethereum (ETH) and Solana (SOL), two prominent altcoins, showcases positive results.
The upward trajectory observed in both equity lines reinforces the strategy’s effectiveness. However, to maximize results for Ethereum and Solana, it would be necessary to optimize the parameters further, akin to the process undertaken for Bitcoin. This undertaking is a suggested pathway for you to explore.
Final Thoughts on Leveraging Bitcoin Volatility in Trading 📋
In summary, the intraday trend-following approach assessed on Bitcoin demonstrates simplicity while offering the opportunity to be tailored through necessary adjustments for use across various other cryptocurrencies. The market remains relatively young but evolves rapidly, presenting many opportunities for traders keen on engagement.
Wishing you successful trading until next time!
Andrea Unger
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