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Bitcoin MACD Trading Strategy (Performance, Backtest, Setup, Rules, Video)

Cryptocurrency trading has become increasingly popular in recent years, and Bitcoin, as the pioneer and most widely recognized digital currency, is at the forefront of this seemingly financial revolution. Traders are constantly seeking strategies to capitalize on the volatility of Bitcoin’s price, and the Moving Average Convergence Divergence (MACD) is one that immediately comes up to their minds. Can we make a profitable Bitcoin MACD trading strategy?

It turns out we can make a very profitable Bitcoin MACD trading strategy with annual returns higher than buy and hold despite spending only a small amount of the time invested.

In this article, we’ll delve into what exactly the MACD is and how it can be applied effectively in the world of Bitcoin trading.

Related reading:

Understanding the MACD Indicator

The MACD is a versatile and widely used technical analysis tool that helps traders identify potential buy and sell signals in the market.

It consists of three components: the MACD line, the signal line, and the histogram. Let’s break down these components:

  • MACD Line: The MACD line is the faster-moving component and is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. This line reflects short-term momentum and provides insights into the direction of the trend.
  • Signal Line: The signal line is a 9-period EMA of the MACD line. It is slower-moving and serves as a signal line, helping traders identify potential entry and exit points.
  • Histogram: The histogram is the visual representation of the difference between the MACD line and the signal line. It provides a clearer indication of the strength and direction of the price momentum.

Traders usually use the MACD to generate trading signals when the MACD line crosses under or above the signal line. Another way to look at it is to see weather the histogram is positive or negative.

They also tend to use multiple indicators and tools. Traders frequently combine the MACD strategy with other technical indicators, such as Relative Strength Index (RSI) or Bollinger Bands, to confirm their trading decisions.

When the MACD generates a signal in the direction of the trend, and the confirmation indicators also confirm the signal, it can increase your confidence in taking the trade.

That said, we like to backtest all we do. If not, how do you know if you have a positive expectancy?

Now that we know what the MACD indicator is its time to develop a trading strategy and backtest it.

Bitcoin MACD Trading Strategy – Trading Rules

The trading rules for the strategy we’re going to backtest are very simple:

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Can these simple trading rules beat buy and hold?

Bitcoin MACD Trading Strategy – Backtest

We backtested the strategy using the price of Bitcoin since 2015. Here is the equity curve:

Bitcoin MACD Trading Strategy
Bitcoin MACD Trading Strategy

The returns look pretty good! Here are some performance metrics and statistics about the strategy:

  • CAGR was 77.24% (buy and hold 61.28%)
  • Time spent in the market was 54.44%
  • Risk-adjusted return was 141.88% (CAGR divided by time spent in the market)
  • Maximum drawdown was -61.97% (-83.40%)

As you can see, the returns of the strategy are much better than buy and hold despite being invested only about half of the time.

More importantly, the maximum drawdown decreases a lot, lowering the volatility of Bitcoin.

Overall, the strategy is superior to buy and hold, although this doesn’t mean that it will continue to be so in the future.

Bitcoin MACD Trading Strategy – Conclusion

The MACD trading strategy is a valuable tool for Bitcoin traders looking to capitalize on price movements in this highly volatile cryptocurrency market. By just employing a basic MACD trading strategy, traders can increase their expected returns while lowering the volatility. The strategy works primarily because Bitcoin has a lot of momentum when it starts going.

However, it’s important to remember that trading always involves risks, and no strategy is foolproof. Bitcoin (and crypto) is very volatile!

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