Trend Following And Momentum Strategies On Bitcoin – Capturing The Trend (Quantified Strategies)

Last Updated on June 11, 2021 by Oddmund Groette

Cryptocurrency markets have many of the characteristics of the commodities markets: Wild swings and gyrations, both up and down.

This is exactly what you want for building and creating a trend following or momentum system! The upside movement can create enormous returns, but the downside is also substantial. However, even simple strategies can limit the downside, as shown in this article.

In this article, we present some simple strategies that have beaten buying and holding bitcoin. By using simple moving averages, you manage to beat “buy and hold”. We can label the strategies both trend following and momentum. We test three trading ideas.

Many have a love or hate relationship with bitcoin. That, of course, doesn’t make much sense if you want to make money in the markets.

As a trader, you need to open and flexible and avoid confirmation biases. We own bitcoins, but we don’t have specific bullish or bearish convictions. However, we are careful with cryptocurrencies because they don’t produce any tangibles, which is one of the main drivers by the magic of compounding:

This article contains no opinions on bitcoin, but we put forward some very simple ideas on how you can potentially trade bitcoin as short-term strategies. In this article, we test BTC-USD.

Trend following in bitcoin:

First, you need to understand what we mean by trend following, something we have covered in an earlier article:

Bitcoin has a history of enormous price swings, which require an “iron ass” to sit through. However, when you are on the right side of the market, volatility is your friend.

But volatility often backfires. Since 2015, bitcoin has suffered substantial setbacks:

Bitcoin has suffered many setbacks/drawdowns along the way.

However, the max drawdown is exactly the same as Nasdaq suffered after the dot-com bubble in 2000-2002: 82%. Nasdaq required about ten years to fully recover, but so far bitcoin has recovered shortly after a significant drawdown.

Drawdowns are often hard to recover from: a 50% drop needs to rise 100% to recover. So far, bitcoin has managed to return reasonably quickly, but there is of course no guarantee this will continue.

Let’s look at some simple trend following ideas:

Trend following using a short 20-day exponential average:

In the tests below we are using free data from yahoo/finance. The ticker code is BTC-USD and data is from 2015 until April 2021. Commissions, slippage, and taxes are not included.

Let’s start by using a short 20-day exponential moving average. We buy if the close is above the 20-day moving average, and we sell when it crosses below the 20-day moving average. Entries and exits are at the close.

The equity curve looks like this:

  • The number of trades is 127
  • The average gain per trade is 5.99%
  • The win ratio is 33% (!)
  • Max. drawdown is 39%
  • The profit factor is 2.69
  • CAGR is 126% compared to buy and hold which was 94%

The equity curve is a log scale. When you have assets that have risen as much as Bitcoin, you need to use logarithmic charts, not linear. The difference is enormous:

An optimization reveals that the best results come by using an average less than 20 days. The best result was using five days, which had a CAGR of 145%. It seems like an exponential average works better than a simple one.

Let’s test a longer average and by using two simple moving averages: one short average of 100 days and a longer of 250 days. We go long when the short one is above the long one, and we sell when the opposite happens. Entries and exits are at the close.

The strategy returns three trades:

The moving averages have managed to keep you out of the worst drawdowns, even though max drawdown is still a hefty 65% during 2018.

CAGR is 115%, better than buy and hold of 94%.

Momentum in bitcoin:

Let’s jump from trend following to momentum, which often yields the same result.

We test the performance if the close is higher than the close 25 days ago, and sell when the close is lower than the close 25 days ago.

The equity curve ends up like this:

  • The number of trades is 91
  • The average gain per trade is 8.7%
  • The win ratio is 40% (!)
  • Max. drawdown is 66%
  • The profit factor is 3.84
  • CAGR is 108% compared to buy and hold which was 94%

Conclusion about trend following and momentum in bitcoin:

Trading doesn’t need to be complicated. Will these three strategies mentioned in this article still work in the future?

As long as bitcoin continues its wild gyrations, we believe so.

Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinion – they are not suggestions to buy or sell any securities.