1/ Larry Connor’s 2-period RSI strategy on crypto. How to trade crypto with a two-decade-old strategy.
2/ I like to test old strategies that have worked or are working in stocks or commodities. It's good inspiration and often these strategies with minor tweaks are well applicable in crypto.
3/ Larry Connors' RSI2 strategy is probably one of the most famous Mean reversion strategies in stock trading. Will it work in crypto? Can we take it further with more research?
4/ Basic entry rules: 1. Close > Moving Average 200 2. Close < Moving Average 5 3. RSI 2 < 10 Exit rule: Close > Moving Average 5 We use daily bars. We enter and exit at the close. How will such a strategy work on Bitcoin?
5/ Not very well. By 2020 the strategy has earned only 50% on Bitcoin. It's been out of the market most of the time.
6/ On Ethereum, the results are even worse. The strategy has made nothing in the last 3 years.
7/ From these results, it looks like the strategy makes no sense to trade. Let's take another look at how the strategy performs on a basket of the 100 largest cryptocurrencies. We will always enter the maximum of the 3 coins that are growing the fastest over the last 7 days.
8/ The strategy has earned 370% in 3 years. It hasn't earned anything since 2022. Yet this is a period when it should perform relatively decently. The drawdowns are also quite deep. Up to 50%. This is not an ideal characteristic of a Mean Reversion strategy.
9/ What is the main reason for these deep declines? Entries into the market when conditions are not right. What exactly does that mean? That we are entering an oversold market in a severe downturn - a bear market. But we can avoid this by using the context filter!
10/ My favorite basic context filter for crypto long trades? BTC > Moving Average 50 With this simple and logical tool, we enter at the moment when Bitcoin is in a bullish phase.
11/ Portfolio results are suddenly significantly better! We stayed out of the market for part of 2022, preserving valuable profits. In 2023, once the market started to grow, we started to pick up profitable trades again.
12/ I can imagine this strategy with other minor tweaks being traded live. At the beginning, the whole idea seemed almost useless. Old strategies often work in crypto. They just need to be partially adapted to the nature of this market.
@PKycek Very good
@hitesheidnani Thank you.