Hello friends,
In the last post, I mentioned the first major technical trading strategy that is available to you, in this I will cover the second and finish this two-part short series of posts.
The moving average is a very simple, but very versatile and useful tool. Averages are just kind of an amazing mathematical beauty in themselves, you can do a lot with them. You can calculate the center of mass using integrals that sum infinitely many terms and divide by infinity. You can quicky sum numbers using them: consider summing the first 100 integers. (1 + 100)/2 = 50.5. This is the average value of each term in the sequence, if you multiply it by the number of terms, you get the sum of the series: 50.5*100 = 5050. You can check this is the sum for yourself. Gauss famously used this technique. Averages are fundamental to integration which is a key part of all of the physics that makes the universe possible.
The moving average of finance is no less graceful or majestic. The markets tend to obey them again and again following unwritten, unknowable laws. To get to the point: as we saw in the last entry, the moving average can be used to identify a trend, but it can also be used as a tool for mean reversion. That such a simple technique can be used profitably is a beautiful thing. I could write an article about why you should keep everything as simple as possible, but not today.
In bitcoin, as you can see, the 200 moving average seems to be part of the technical structure that has caused us to bounce 200% off of it. If you had been watching this long term moving average, it would have worked out pretty well for you. But Shkreli, I hear you say, Bitcoin has only been trading for hardly over 200 weeks, there's not enough data here to suggest it is significant. Yes, that's true. I leave it to you to see if it is relevant in other markets. I'm just here to try to get you thinking about strategy (maybe even inspire you to put it into code so that you can be automated, ask me if you're interested about that..)
The RSI below it is also a very common tool used by the mean reversion trader. The idea is that it tells you by some magical formula that a market is oversold or overbought. In bitcoin, really on any timeframe, it seems that mean reversion is kind of a terrible idea on the short side, but on the long side, it works pretty well as you can see with the weekly RSI data. I've selected the weekly here because it is very important. I didn't want to do two posts of daily charts. I think I am one of the few traders I see who seems not to care at all about short term movements. I believe this gives me a clarity that most do not have. I don't have to worry as much and can just stick to the plan much easier. If you know about the sharpe ratio, you know that optimally you want to be trading very often (quantitatively, probably not manually) but I've always been willing to forgo optimal returns in theory to do what felt right for me. (I am not trying to personally trade anymore - I am moving to quantitative so this doesn't necessarily reflect what I do today, but it's how I cut my teeth in the markets. In reality I am looking to place tens of thousands of trades a year on some strategies)
As is suggested in the name, mean reversion is based on the assumption that prices are going to sometimes perform above average and sometimes below average. You want to be long when they are below average and short when they are above average in simplest terms.
Thus concludes the second main strategy in the technical trader's toolkit. Now that I've narrowed your focus and maybe clarified what you already knew, what are you going to take away from this? How are you going to trade going forward? What do you think is going to make money?
I wish you all the best of luck in your trading endeavors. Always backtest your strategies and be as methodical as you can be.
YoungShkreli
My next post will likely be focused on some element of trading that isn't about seeking alpha, but instead about execution, risk, modelling or something else. I'm not sure, but too much attention is given to TA and setups and this is a mistake.
In the last post, I mentioned the first major technical trading strategy that is available to you, in this I will cover the second and finish this two-part short series of posts.
The moving average is a very simple, but very versatile and useful tool. Averages are just kind of an amazing mathematical beauty in themselves, you can do a lot with them. You can calculate the center of mass using integrals that sum infinitely many terms and divide by infinity. You can quicky sum numbers using them: consider summing the first 100 integers. (1 + 100)/2 = 50.5. This is the average value of each term in the sequence, if you multiply it by the number of terms, you get the sum of the series: 50.5*100 = 5050. You can check this is the sum for yourself. Gauss famously used this technique. Averages are fundamental to integration which is a key part of all of the physics that makes the universe possible.
The moving average of finance is no less graceful or majestic. The markets tend to obey them again and again following unwritten, unknowable laws. To get to the point: as we saw in the last entry, the moving average can be used to identify a trend, but it can also be used as a tool for mean reversion. That such a simple technique can be used profitably is a beautiful thing. I could write an article about why you should keep everything as simple as possible, but not today.
In bitcoin, as you can see, the 200 moving average seems to be part of the technical structure that has caused us to bounce 200% off of it. If you had been watching this long term moving average, it would have worked out pretty well for you. But Shkreli, I hear you say, Bitcoin has only been trading for hardly over 200 weeks, there's not enough data here to suggest it is significant. Yes, that's true. I leave it to you to see if it is relevant in other markets. I'm just here to try to get you thinking about strategy (maybe even inspire you to put it into code so that you can be automated, ask me if you're interested about that..)
The RSI below it is also a very common tool used by the mean reversion trader. The idea is that it tells you by some magical formula that a market is oversold or overbought. In bitcoin, really on any timeframe, it seems that mean reversion is kind of a terrible idea on the short side, but on the long side, it works pretty well as you can see with the weekly RSI data. I've selected the weekly here because it is very important. I didn't want to do two posts of daily charts. I think I am one of the few traders I see who seems not to care at all about short term movements. I believe this gives me a clarity that most do not have. I don't have to worry as much and can just stick to the plan much easier. If you know about the sharpe ratio, you know that optimally you want to be trading very often (quantitatively, probably not manually) but I've always been willing to forgo optimal returns in theory to do what felt right for me. (I am not trying to personally trade anymore - I am moving to quantitative so this doesn't necessarily reflect what I do today, but it's how I cut my teeth in the markets. In reality I am looking to place tens of thousands of trades a year on some strategies)
As is suggested in the name, mean reversion is based on the assumption that prices are going to sometimes perform above average and sometimes below average. You want to be long when they are below average and short when they are above average in simplest terms.
Thus concludes the second main strategy in the technical trader's toolkit. Now that I've narrowed your focus and maybe clarified what you already knew, what are you going to take away from this? How are you going to trade going forward? What do you think is going to make money?
I wish you all the best of luck in your trading endeavors. Always backtest your strategies and be as methodical as you can be.
YoungShkreli
My next post will likely be focused on some element of trading that isn't about seeking alpha, but instead about execution, risk, modelling or something else. I'm not sure, but too much attention is given to TA and setups and this is a mistake.