Bitcoin RSI Trading Strategy

Bitcoin RSI Trading Strategy: Assessing RSI’s Effectiveness in Crypto Trading (Backtest & Trading Rules)

Does the RSI Indicator work on crypto or Bitcoin? Bitcoin and other cryptos are attracting many traders and new investors, and the crypto daily volume is rising significantly, probably draining resources from the more traditional stock trading arena. The crypto market is a completely new market that is quite different from the traditional equity markets. One reason for the difference is that crypto is new and lacks a long history, and the other is that crypto is an asset that doesn’t produce tangible values as ownership of equity does.

The RSI indicator seems to work on Bitcoin and cryptocurrencies. RSI as a momentum indicator shows some real promise in cryptos, but the traditional mean reversion strategy of buying the dip and selling strength doesn’t work on Bitcoin and cryptos.

Keep reading to learn more about our tests.

What is the RSI indicator?

We have previously written about the RSI indicator. We recommend reading this article to make sure you have a firm grasp of what the indicator actually measures:

RSI measures both the speed and magnitude of the price movements relative to itself. It oscillates between 0-100 where 0 is “oversold” and 100 is “overbought”.

To buy low RSI readings and selling high RSI readings have worked well on US equities, but have been less successful on forex and commodities. Does it work better on Bitcoin and cryptos?

Does RSI work on crypto or Bitcoin trading? Is RSI good for crypto?

We first test for mean reversion: buy low RSI readings and sell high readings.

RSI on crypto and Bitcoin as a mean reversion indicator

We optimized three tests by using three variables and enter and exit at the close:

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This gives, in total, 640 optimization or simulations (10 x 8 x 8). Fortunately, this is done in two seconds in Amibroker.

The results are weak with few fills. This is a summary of the variations with the best profit factor on Bitcoin from January 2015 until September 2021:

Bitcoin RSI

The first row tells us that using RSI(25) and entering when the RSI crosses below 30 and exiting when it crosses above 80 is the best strategy. But the strategy has only 3 trades and is completely unusable as a future prediction.

If we sort by the number of trades the profit factor diminishes a lot.

What do these numbers tell us? It tells us that RSI as a contrarian indicator is basically worthless on Bitcoin. This is a whole other ballgame than stocks and equities.

Does it get any better on other cryptos? We tested on Ethereum and Doge but we got the same results.

RSI on crypto and Bitcoin as a momentum indicator

What happens if we test RSI as a momentum indicator? We test the following strategies by optimizing these three variables and enter and exit at the close:

  1. For the # of days to use in the RSI-formula (the number of days from 5 to 50 with intervals of 5)
  2. For the threshold of entry  (from 50 to 75 with intervals of 5)
  3. For the threshold of exit (from 75 to 50 with intervals of 5)

We buy when the RSI crosses above variable number 2, and sell when it heads down and crosses below variable number 3. This gives, in total, 360 optimization or simulations (10 x 6 x 6).

Compared to the mean reversion results, the momentum results are much better.

On Bitcoin, the best results are clustered around a relatively short number of days. This is a sample of some of the RSI(5) results:

RSI on crypto and Bitcoin as a momentum indicator

If we pick one of these randomly, let’s say entry when the five-day RSI breaks above 50 and sell when it breaks down below 50 again, we get this equity curve and drawdowns assuming 100% invested into each trade:

RSI on Bitcoin backtest

This is a pretty good result with a better CAGR than buy and hold (122% vs. 101%) and much less drawdowns (39% vs 83%).

We get pretty good numbers with Ethereum and Doge as well.

In a previous article, we backtested an RSI momentum strategy on stocks and concluded it doesn’t work in the stock market.

Recommended reading:

Conclusion: Does RSI Work On Crypto Or Bitcoin Trading?

What did we learn by doing this RSI test on Bitcoin and cryptos?

Is RSI good for Bitcoin and crypto? RSI as a mean reversion indicator doesn’t work on Bitcoin.

However, if we use the RSI as a momentum indicator it seems to work pretty well. Thus, RSI seems to work on crypto and Bitcoin.

FAQ:

Is RSI effective for mean reversion in Bitcoin trading?

No, mean reversion strategies using RSI (buying low RSI readings and selling high readings) do not seem to be effective in Bitcoin trading. The crypto market behaves differently than traditional equities in this regard.

What is the conclusion regarding RSI effectiveness in crypto trading?

Mean reversion strategies using RSI may not be effective in crypto, but utilizing RSI as a momentum indicator has shown positive results. RSI seems to work well in the crypto market, providing opportunities for traders.

Can RSI be considered a reliable tool for crypto investors and traders?

RSI can be considered a reliable tool for crypto investors and traders when used as a momentum indicator. It provides insights into potential entry and exit points, especially in cryptocurrencies like Bitcoin, Ethereum, and Dogecoin.

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