Beginner Trading channel on youtube argued that a simple EMA(12) and SMA(26) crossover strategy is very profitable for penny stocks when traded in a 5 minute chart. I wondered how this strategy would work with Bitcoin market again using 5 minute data. So I backtested it. I present the results and interpret them. Remember, this is not trading or investment advice.
The Strategy
Buy when:
- EMA(12) > SMA(26) crossover
Sell when:
- EMA(12) < SMA(26) crossover
No stop loss or profit target was recommended in the original strategy so I used these two simple rules.
Backtesting Results
The results look like this:
Start 2020-11-01 00:00:00
End 2020-12-30 23:55:00
Duration 59 days 23:55:00
Exposure Time [%] 57.546296
Equity Final [$] 609980.7629
Equity Peak [$] 1045641.93218
Return [%] -39.001924
Buy & Hold Return [%] 108.28478
Return (Ann.) [%] -94.211996
Volatility (Ann.) [%] 2.845424
Sharpe Ratio 0.0
Sortino Ratio 0.0
Calmar Ratio 0.0
Max. Drawdown [%] -43.952138
Avg. Drawdown [%] -6.995472
Max. Drawdown Duration 54 days 19:45:00
Avg. Drawdown Duration 7 days 11:32:00
# Trades 394
Win Rate [%] 28.172589
Best Trade [%] 5.959047
Worst Trade [%] -2.153583
Avg. Trade [%] -0.126971
Max. Trade Duration 0 days 09:20:00
Avg. Trade Duration 0 days 02:02:00
Profit Factor 0.715007
Expectancy [%] -0.121902
SQN -2.539287Not good. We lost money, only 28% of the trades were successful. So not a good strategy. But was it specific to this period only. Let’s test for about 3 years.
Start 2018-02-01 00:00:00
End 2021-05-12 06:40:00
Duration 1196 days 06:40:00
Exposure Time [%] 18.413089
Equity Final [$] 3918.11676
Equity Peak [$] 1000000.0
Return [%] -99.608188
Buy & Hold Return [%] 470.693757
Return (Ann.) [%] -81.091121
Volatility (Ann.) [%] 5.676853
Sharpe Ratio 0.0
Sortino Ratio 0.0
Calmar Ratio 0.0
Max. Drawdown [%] -99.608409
Avg. Drawdown [%] -99.608409
Max. Drawdown Duration 1196 days 01:15:00
Avg. Drawdown Duration 1196 days 01:15:00
# Trades 2963
Win Rate [%] 18.292271
Best Trade [%] 12.092364
Worst Trade [%] -4.085147
Avg. Trade [%] -0.209843
Max. Trade Duration 0 days 10:05:00
Avg. Trade Duration 0 days 01:43:00
Profit Factor 0.483296
Expectancy [%] -0.205389
SQN -4.00373We lost all of our capital. The chart makes it obvious.
We started trading by the beginning of February 2018 and we ran out of money by March 2019. This is what I mean by why seemingly simple strategies may be actually disastrous. Could we optimize the periods, maybe then we could have find a better one?
Optimization
The optimization resulted in EMA(90) and SMA(210), much longer trend indicators. Here’s the results of the optimization:
Start 2020-11-01 00:00:00
End 2020-12-30 23:55:00
Duration 59 days 23:55:00
Exposure Time [%] 62.980324
Equity Final [$] 1603351.7695
Equity Peak [$] 1642525.2846
Return [%] 60.335177
Buy & Hold Return [%] 108.28478
Return (Ann.) [%] 1690.449013
Volatility (Ann.) [%] 1103.152626
Sharpe Ratio 1.53238
Sortino Ratio 76.360411
Calmar Ratio 138.838699
Max. Drawdown [%] -12.175633
Avg. Drawdown [%] -1.153843
Max. Drawdown Duration 15 days 10:40:00
Avg. Drawdown Duration 0 days 13:44:00
# Trades 46
Win Rate [%] 34.782609
Best Trade [%] 16.727376
Worst Trade [%] -2.833002
Avg. Trade [%] 1.035457
Max. Trade Duration 3 days 14:00:00
Avg. Trade Duration 0 days 19:38:00
Profit Factor 2.284182
Expectancy [%] 1.131593
SQN 1.594258At least we did not loose money, we only made almost one tenth of the trades compared to the original EMA(12) and SMA(26), and our win percentage is now almost 35%. But surely we overfit, let’s test this optimized strategy with the 3 year period.
Start 2018-02-01 00:00:00
End 2021-05-12 06:40:00
Duration 1196 days 06:40:00
Exposure Time [%] 53.226153
Equity Final [$] 1298782.89338
Equity Peak [$] 1590591.9889
Return [%] 29.878289
Buy & Hold Return [%] 470.693757
Return (Ann.) [%] 8.298038
Volatility (Ann.) [%] 61.961383
Sharpe Ratio 0.133923
Sortino Ratio 0.271092
Calmar Ratio 0.116559
Max. Drawdown [%] -71.191964
Avg. Drawdown [%] -2.372152
Max. Drawdown Duration 1094 days 01:45:00
Avg. Drawdown Duration 11 days 11:36:00
# Trades 991
Win Rate [%] 29.465187
Best Trade [%] 22.440909
Worst Trade [%] -9.121152
Avg. Trade [%] 0.027241
Max. Trade Duration 4 days 03:30:00
Avg. Trade Duration 0 days 15:21:00
Profit Factor 1.082458
Expectancy [%] 0.073686
SQN 0.406756Again at least we did not loose money, but we made 15 times less than buy and hold.
Conclusion
I think it is clear that we should never blindly follow other’s strategies and do our own research. The simple EMA and SMA crossover strategy suggested performed terribly with Bitcoin.