Momentum strategies with different moving averages

One of the simplest strategies for trading cryptocurrencies involves the application of moving averages (MA). The basic premise is that if the price of an asset is above its moving average for a certain number of days, this is considered a buy signal. Once it falls below its moving average, the asset is sold, and a cash position is maintained until the price crosses the moving average again in the upper direction.

Cointelegraph Consulting’s latest bi-weekly newsletter issue looks at the many ways moving averages can be tweaked to catch Bitcoin price swings. Using Coin Metrics’ price data, this analysis is broken down into four parts. The first part uses trading strategies for different simple moving averages (SMA) — i.e., equal weighting of all past prices within the specified time window. The second part of this analysis looks at a specific form of moving average, the exponential moving average (EMA), where the weight of the more recent periods increases exponentially.

The third part looks at strategies that only trade once significant momentum signals appear, namely the golden cross and the death cross. Finally, rolling returns of different moving average strategies will be considered to evaluate which strategy was most successful.

Simple moving averages vs. exponential moving averages

For the sample period chosen in the charts below, the 50- and 100-day SMA strategies outperform their EMA counterparts. However, choosing a 20- or 200-day EMA strategy yields better results compared to the simple moving average strategies. It comes with the added benefit that maximum drawdowns are significantly lower.

In general, it is not clear which type and length of moving average will yield the best results. As EMAs put higher weight on more recent market moves, they are more likely to provide a trading signal earlier, albeit at the cost of some signals being wrong.

Comparison based on different entry points

Some of the strategies described above appear to be successful. However, beating the market is more difficult than following simple timing strategies. Especially in a bull market, many strategies yield results simply because the general trend is positive. In more difficult times, many strategies cannot shield from incurring losses.

If one invested based on these strategies in January 2022, all strategies would have beaten the market. The 200-day MA strategy would have signaled not to invest at all, which would have yielded the best outcome. All other…