Trend trading works for cryptocurrencies. It’s better than HODL’ing.
Cryptocurrencies are great for technical traders. Lacking the fundamentals of fiat currencies (interest rate differentials, trade balances, government debt, etc.), trading cryptocurrencies defaults to technical analysis.
Many volumes have been written about trend trading. Why do we like it? Because it’s simple and it works. The premise of trend trading is to get in a trade once there’s an indication of a trend and exit once there’s indication the trend has changed or ended.
How do you tell when the trend has started and ended? That’s the million dollar question, eh? Let’s keep it simple. First of all, I’d like to show a couple of strategies that have been coded for backtesting in TradingView.
The first one is something I cobbled together that I simply labeled ‘Trendy’. It’s a strategy that uses the EZ Trend indicator along with the ASI to provide entry and exit signals.
To the left is a snip of the parameters set for the strategy to operate.
I set a start date of 1st January, 2019 to begin the backtest with and end date of 9th June 2021.
The first trade was a short sale at $130.48. My basis for comparison was to see which would be better…trading the Trendy strategy or buying 10 Ethereum and HODL’ing.
I wanted each case to start out with the same dollar amount, so the Trendy backtest was given an initial capital of $1,304.8 (10x$130.48). The order size for each trade in the backtest is 100% of the account equity.
So, which has performed better to date, Trendy strategy vs. HODL’ing? Before moving to the chart, let’s do some simple math to figure out the potential profit for HODL’ing…as I’m writing, the ETHUSD price is right at $2,500. If you HODL’d 10 Ethereum over the same timeframe you would have made $25,000–$1304.8 = $23,695.2.
So how did the Trendy strategy do?
A net profit of $34,306.23? There’s no doubt this is better than HODL’ing. However, there are some caveats…I am able to cherry pick the best backtest results which of course is exactly what I’ve done. While I didn’t cherry pick the dates for the backtest, I did massage the various indicator inputs over the different chart timeframes to arrive at the best possible outcome for this strategy.
I decided to use these results not to necessarily highlight the net profit, rather the overall stats for the strategy. Looking at the 31.63% percent profitable trades…what does this tell us? It’s exactly what I would expect from a trend trading strategy. Numerous smaller losses that are greatly overshadowed by fewer, much larger winning trades. That’s what trend strategies do. Catch a trend and ride it as long as possible. While waiting for a trend to develop, trade losses are kept small.
Unfortunately, trend trading strategies can realize a large drawdown which exceeds the risk appetite for a lot of people. The 44% drawdown for the Trendy strategy above is massive. But what about those who are HODL’ing? From a high of $4,380 to today’s $2,500…a 43% drawdown from the high. But wait…if the Trendy strategy keeps running the last trade is a short position with an entry of $2,521. If ETH drops to $1,000, the Trendy strategy could still maintain the max drawdown of 43% and continue to profit. At $1,000, HODL’ing will realize a 77% drawdown from the high.
Ok, so I cherry picked the Trendy strategy backtest results to make it look good. The HODL crowd is skeptical at this point. I get it. I’ve got another strategy up my sleeve.
Ever hear about the Turtle Traders? If no, GTS (google that shit!). It’s one of my favorite strategies and for good reason. It’s proven to work. While it was developed for trading futures, it also works for trading cryptocurrencies.
Another Medium author has written about using the strategy for trading cryptocurrencies:
FWIW, I don’t know the author but do like the article which references some good material including a book from Michael Covel, a huge proponent of trend trading. Check out his work if you are not familiar.
I’m not going to dig into the details of the Turtle strategy. I will point you in the direction of a TradingView strategy that uses the basis of the Turtle strategy.
This strategy uses 55 period channel for entries & a 20 period channel for exits, which is a portion of the original Turtle strategy. While this TradingView strategy misses a lot from the original strategy such as risk control and position pyramiding, it allows us to demonstrate the potential of the strategy.
Let’s look at how it does with Ethereum:
To the left are the starting parameters for the backtest of the Turtle Trend Trading System on TradingView.
Initial capital is $1,000 with 100% of equity going to each trade.
I didn’t edit the script so select a start and end date. I believe it goes back a certain number of bars. Regardless, in this back test the first trade was 11th September, 2015. This was a short trade of 1008.8343 ETH entered at a price of $0.99.
Comparing a HODL strategy starting with the same amount, 1008.8343, this would equate to $2,522,085.75 at today’s price of $2,500. Damn impressive return. Starting with $1,000 in September of 2015, that would have turned into over $2.5MM six years later. Those numbers are simply hard to comprehend. How can a trend trading strategy beat that?
$4,326,716.29 net profit. Trend trading wins again! Looking at the statistics reported by the strategy tester, the number of profitable trades is a higher percentage than the Trendy strategy. This makes sense as the strategy was run on higher timeframe (12hr vs 3hr) which tends to have less whipsaw movement.
While the profit is massive, the 62% drawdown is equally massive. It is worth noting that HODL’ing since 2015 would have seen larger drawdowns ($1,420 high in 2018 to $88 low in 2020 = ~94% drawdown!).
For me the evidence is conclusive. Trend trading strategies offer returns that historically have been better than HODL’ing. There’s factors moving forward such as interest from staking that could turn the tables…but there’s a lot of unknowns.
If you consider yourself a trader and haven’t yet found a trading system to your liking, it’s worth taking a look at trend trading.