Developing a Trading Strategy

Developing a Trading Strategy | Part 2

In the last post, I set some basic parameters for a trading strategy. I decided to use two moving averages on a 5 min minute time frame as part of an entry signal. I have done some initial testing and have discovered a few things which have prompted me to make a few changes.

I will update you with what I have found in this post and will discuss refining the entry. Once we have done this, we can start doing some serious testing. Then we will know if it is worthwhile continuing or if we need to go back and try something different.

The little bit of testing I did looks promising, but it does need more work. The 3 & 8 EMA gives some good signals, but there is also a lot of noise on the 5 min charts. I have found that a lot of the noise goes away on a 15-minute chart. I wanted to keep the strategy as simple as possible, so I have decided on some different indicators after doing some testing.

I still think the 3,8 EMA’s could have some potential and will investigate this further when time permits, but I have decided to go for a simpler approach for now. I will use 2 indicators only, the 20-period EMA and the MACD.

Let’s have a look at what I have found so far…

The Journey so Far

I found with the 3 and 8 MA’s that it does give you a lot of signals, but I could not find another reliable indicator to use with the MA’s for an entry. You can see on the chart above that you do get many crosses on the moving averages; however, you also get many signals that fail, and I could not find anything else reliable.

It does have some merit, and I think you could find an edge with some work, but I have decided to go with a simpler method for now. Scalping needs to be easy for you to implement, and you must use a good exchange with low fees. Because you will be taking many trades with smaller profit targets, fees do matter and can make the difference between a profit & a loss.

With scalping, you need to find what suits you as an individual, what suits your trading style. For these reasons, I have decided to make it simpler and go with a 20-period EMA and a standard 12,26,9 MACD.

The New Strategy

I have made the strategy simpler and will now go and do some testing. The strategy is still based on the 5 min time frame, but now we will use the 20-period Exponential Moving Average for trend direction. We will combine the 20 EMA with the standard MACD of 12,26,9. The MACD will help us gauge momentum.

The Rules – So Far

  • To go long, we want the price to be under the 20-period EMA and the MACD to be in negative territory.
  • Wait for the price to cross above the 20-period EMA, then make sure that MACD is either in the process of crossing from negative to positive or has crossed into positive territory.

That is the very basics of the strategy, and we will add more rules as we test. The little bit of testing I have done has indicated that it can catch such big movements, so I may look at taking some profit and letting some run. We will define the rules once tested.

For a short trade, it will be the opposite; see the red arrows on the chart on the left. You can see that the price candle crosses the 20 EMA, and the MACD is going into negative territory; this is the entry signal to go short.

The green arrows are a buy. It just so happened that these two trades set up while I was writing this article. For the buy, you can see how the price was under the 20 EMA and where the green arrow is it crosses the 20 EMA. At this point, the MACD is going into positive territory.

I am not sure about the take profit points or stop losses yet. I will do some testing and see what works best. I think I will scale out of the trade to pick up some profit on potential runners. It may be that I take 50% at 1:1 move stop to break even, have a trailing stop or a signal to exit the trade.

Let the Fun Begin – Testing

OK, now we need to test and get some results, then we can set a few more rules once we have some data. I will start testing on BTC, ETH & BNB and see what results I get. If it looks good, I will do the top 10 coins by market cap. This part takes time. You have to manually go back through all your charts, look for the signals, and record the results.

I will set some more rules for taking profits and stop losses once I have done some testing. I ALWAYS trade with a stop loss. It will just be a matter of where to place the stop loss; how big? All going well. Once strict rules have been set, it will be time to do some more testing.

Then we will see how it goes in the live market I will “Paper Trade” and publish the results. If it goes well, I will start small with real skin in the game and trade the strategy with real money. Ideally, I would like to automate the strategy so it can be traded with a trading bot.

Conclusion

Testing, testing, and more testing is the only real way to get to know a strategy with real results that you can use to tweak the strategy to get better results. Money management is also a critical part of the success that I have not talked about yet. A proper trading plan will need to be developed around this strategy as well.

I have not used it before, but I am also looking into the “pine editor” in Trading View and considering using this for some backtesting to speed up the results. Although it is another learning curve, I think it will be beneficial and save time for testing.

It may be a while before my next post in this series, as there is a lot to learn (pine editor) and a lot of testing to do. On another note, I know that this strategy works for FX, it is a strategy that I have seen tested on FX, and it does work. What I am trying to do is adapt it to suit the crypto market.

I know these posts are a bit advanced and may seem a bit heavy or too technical, but in the end, hopefully, we will have an easy to implement crypto trading strategy that we can automate or trade with a bot. Anyway, I will keep you updated and post some results soon and remember… Be the Best you can Be.

DeFi Dave

 


! DISCLAIMER: I am not a financial advisor. This is not financial advice. The content and material I provide on 2dsirecrypto.com is my opinion only and general in nature. Always do your own research before investing any money. You should always understand the risks involved in trading and investing and seek advice from licensed professionals before undertaking any investments of your own.

2 thoughts on “Developing a Trading Strategy | Part 2”

  1. Dave, I can’t tell you how grateful I am that it is you doing the testing instead of me! I would never know where to start and I wish I understood more of the trading terminology.  However, I am continuing to follow to see if you have success with the strategy you are testing.  I hope, once you do have success, you can develop a program that people like me, with little trading experience, can learn to implement with our own portfolios.  Rooting for your success! 

    1. Hi Ashley, Yes there is a lot of testing to do and my aim is to come up with a profitable trading strategy that you can easily implement. It may take a while to get through the testing.

      If you are keen to learn more I would suggest the Free Trader Cobb course, you can learn all the basics there and did I mention its Free. 

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