Bitcoin Momentum Strategy

12 mars

This is a very simple long-only strategy I've used since December 2022 to manage my Bitcoin position.

I'm sharing it as an open-source script for other traders to learn from the code and adapt it to their liking if they find the system concept interesting.

General Overview
Always do your own research and backtesting - this script is not intended to be traded blindly (no script should be) and I've done limited testing on other markets beyond Ethereum and BTC, it's just a template to tweak and play with and make into one's own.

The results shown in the strategy tester are from Bitcoin's inception so as to get a large sample size of trades, and potential returns have diminished significantly as BTC has grown to become a mega cap asset, but the script includes a date filter for backtesting and it has still performed solidly in recent years (speaking from personal experience using it myself - DYOR with the date filter).

The main advantage of this system in my opinion is in limiting the max drawdown significantly versus buy & hodl. Theoretically much better returns can be made by just holding, but that's also a good way to lose 70%+ of your capital in the inevitable bear markets (also speaking from experience).

In saying all of that, the future is fundamentally unknowable and past results in no way guarantee future performance.

System Concept:
Capture as much Bitcoin upside volatility as possible while side-stepping downside volatility as quickly as possible.

The system uses a simple but clever momentum-style trailing stop technique I learned from one of my trading mentors who uses this approach on momentum/trend-following stock market systems.

Basically, the system "ratchets" up the stop-loss to be much tighter during high bearish volatility to protect open profits from downside moves, but loosens the stop loss during sustained bullish momentum to let the position ride.

It is invested most of the time, unless BTC is trading below its 20-week EMA in which case it stays in cash/USDT to avoid holding through bear markets. It only trades one position (no pyramiding) and does not trade short, but can easily be tweaked to do whatever you like if you know what you're doing in Pine.

Default parameters:
HTF: Weekly Chart
EMA: 20-Period
ATR: 5-period
Bar Lookback: 7

Entry Rule #1:
Bitcoin's current price must be trading above its higher-timeframe EMA (Weekly 20 EMA).

Entry Rule #2:
Bitcoin must not be in 'caution' condition (no large bearish volatility swings recently).
Enter at next bar's open if conditions are met and we are not already involved in a trade.

"Caution" Condition:
Defined as true if BTC's recent 7-bar swing high minus current bar's low is > 1.5x ATR, or Daily close < Daily 20-EMA.

Trailing Stop:
Stop is trailed 1 ATR from recent swing high, or 20% of ATR if in caution condition (ie. 0.2 ATR).
Exit on next bar open upon a close below stop loss.

I typically use a limit order to open & exit trades as close to the open price as possible to reduce slippage, but the strategy script uses market orders.

I've never had any issues getting filled on limit orders close to the market price with BTC on the Daily timeframe, but if the exchange has relatively low slippage I've found market orders work fine too without much impact on the results particularly since BTC has consistently remained above 20k and highly liquid.

Cost of Trading:
The script uses no leverage and a default total round-trip commission of 0.3% which is what I pay on my exchange based on their tier structure, but this can vary widely from exchange to exchange and higher commission fees will have a significantly negative impact on realized gains so make sure to always input the correct theoretical commission cost when backtesting any script.

Static slippage is difficult to estimate in the strategy tester given the wide range of prices & liquidity BTC has experienced over the years and it largely depends on position size, I set it to 150 points per buy or sell as BTC is currently very liquid on the exchange I trade and I use limit orders where possible to enter/exit positions as close as possible to the market's open price as it significantly limits my slippage.

But again, this can vary a lot from exchange to exchange (for better or worse) and if BTC volatility is high at the time of execution this can have a negative impact on slippage and therefore real performance, so make sure to adjust it according to your exchange's tendencies.

Tax considerations should also be made based on short-term trade frequency if crypto profits are treated as a CGT event in your region.

Summary:
A simple, but effective and fairly robust system that achieves the goals I set for it.

From my preliminary testing it appears it may also work on altcoins but it might need a bit of tweaking/loosening with the trailing stop distance as the default parameters are designed to work with Bitcoin which obviously behaves very differently to smaller cap assets.

Good luck out there!

9 nov.

Notes de version

Fixed stop loss not appearing until bar 2 after entry