Predictability of Technical Trading Rules in the Cryptocurrencies

Cryptocurrency trading is the process of buying and selling digital assets in order to make a profit. Cryptocurrency trading can be a profitable activity, but it also comes with a lot of risks. In order to be successful at trading, you need to have a solid understanding of the market and the assets you’re trading. You also need to be disciplined and patient, as the market can be volatile.

The first step in developing a profitable trading strategy is to understand the cryptocurrency market. In a previous post, we discussed the mean-reverting property of Bitcoin. Based on this property, a profitable trading strategy can be developed. In a similar context, Reference [1] examined the profitability of technical trading rules on 10 cryptocurrencies.

This paper examines the predictability of technical trading rules in the cryptocurrencies. A bivariate predictive regression is employed to test the predictability of the technical trading rules. The results indicate that the technical trading rules employed in this paper do indeed have predictable power for cryptocurrencies. The momentum trading rule and the exponential moving average provide the most explanatory power. This paper also examines the predictability of cryptocurrencies amongst themselves by performing a Vector Autoregression analysis. Both the substitute effect and the whole market effect are present in the results of the VAR model, i.e. positive and negative statistically significant coefficients. We found that cryptocurrencies are interconnected with each other at a statistically significant level. Especially Tether shows to have casual effects with other cryptocurrencies. These results have implication for investments, hedging and diversification of risk.

The paper offered interesting insights, and the results are encouraging. However, it’s our understanding that the author performed in-sample tests only. No out-of-sample tests were performed. Without out-of-sample testing, the risk of overfitting is very high.

Let us know if you have the same observation in the comments below.

References

[1] E. Raap, The predictability of cryptocurrencies, Rijksuniversiteit Groningen

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