Trading in Cryptocurrency Market

Trading in Cryptocurrency Market Using Technical Analysis is a Profitable Option

According to recent studies, it has been examined that technical analysis methods and strategies in the cryptocurrency trading market seem to be profitable in the long term.

About the first study

In the first study, it had been mentioned that the daily price data was collected on eleven cryptocurrencies for the period starting from Jan. 1, 2016 to Dec. 31, 2018. The sample included cryptocurrencies that represent the highest market capitalization as at Jan. 3, 2016. The main sample consisted of – Litecoin (LTC), Ripple (XRP), Peercoin, Ethereum (ETH), BitShares, Dogecoin (DOGE), MaidSafeCoin, Stellar Lumen (XLM), Nxt and Namecoin.

With the help of buy-and-hold strategy of an equally weighted portfolio, the cryptocurrencies sample delivered 36.87% per year of an average return over the sample period. It is essential to note that trading in cryptocurrency markets seem to be quite different from the equity markets due to several reasons, with the most important one being that cryptocurrencies are traded 24/7.

We have already executed the most commonly used trading signals rule which is also known as Variable Moving Average oscillator for generating trading signals by employing a short period and a long period. Both of them seem to move together with the level of a price index, on an average. We can focus only on the payoffs from buy positions as it won’t be possible to take short positions on the cryptocurrencies when compared to Bitcoin.

What is mentioned in the first study?

As per the study, running a (1, 20) strategy is all about taking a long position on the cryptocurrency market whenever the present price seems to surpass20-day moving average as well as holding the position till a sell signal has been generated. In turn, a sell signal had been generated when the current price of a cryptocurrency was not more than the 20-day moving average. We have also implemented (1, 20), (1, 50), (1, 100), (1, 150) and (1, 200) strategies in a similar way.

While putting into practice the (1, 20) strategy, it has been found that five among ten cryptocurrencies seem to have generated payoffs that were statistically considerable (at least a 5%). The (1, 20) VMA strategy delivered a 45.63% average return each year for the 10 cryptocurrencies in comparison to the buy and hold average return of 36.87% each year, on an average.

The results denote that a longer time horizon used for executing VMA strategies will result in less profitable technical trading signals.

About the second study

In the second study, it was noted that the same research design of earlier paper was followed, however used data on the 10 most-traded cryptocurrencies have a “privacy function.” In simple words, this privacy function enables users to preserve some anonymity on either user level, account balance level, transaction level or full privacy on all the levels. An example, Dash enables users to have “anonymous send” option when they want to anonymize the user level information.

Hence, the study has employed the following cryptocurrencies such as –Dash (DASH), Monero (XMR), Bytecoin (BCN), Prime-XI (PXI), NavCoin (NAV), CloakCoin (CLOAK), AeonCoin (AEON), DigitalNote (XDN), Stealth (XST) andVerge (XVG). The sample covers the same period as it had been mentioned in an earlier study.

What is mentioned in the second study?

The results of the study have revealed that the VMA strategies are attaining success only for Dash which is on the single cryptocurrency level and seem to have produced profitable returns of 14.6% to 18.25% each year for buy-and-hold trading strategy of the coin. When the average returns across the complete set of 10 privacy coins were calculated, there wasn’t any positive average portfolio returns beyond buy-and-hold portfolio which was equally-weighted.

In a nutshell, the results of the two studies seem to offer mixed evidence. On one hand, the suggested trading signals produce profits when executing effective strategies among non-privacy cryptocurrencies. However, the profitability will be restricted as only shorter time horizons of the VMA’s long-period moving average seem to appear to offer useful information. On the other hand, privacy cryptocurrencies form an efficient market since the trading strategy does not seem to offer significant payoffs for buy-and-hold strategy from a market-wide point of view.

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