I have done considerable research on Bitcoin, published in my article in the August 2020 issue of Technical Analysis of stocks and Commodities and more recently in binance.com. Bitcoin’s rising popularity motivated me to design a strategy for trading bitcoin by taking advantage of my correlation analysis from my research and other conventional technical analysis methods and indicators. In developing the Intermarket conditions I used proprietary intermarket indicators presented in my book Intermarket Trading Strategies. Intermarket conditions can give you an edge in trading Bitcoin and as far as I know, this is the only Bitcoin Intermarket strategy in the market.
When I first developed the system in 2020, I used the S&P500 index and Gold for the Intermarket conditions as my correlation analysis indicated a moderate correlation at the time. Since the end of 2021, however, the correlations have changed. The Bitcoin does not trade as an anti-inflation asset (with inflation running at 40-year highs) any more but as a risk asset. As such, the bitcoin has a strong correlation with the NASDAQ ETF (QQQ) and the Ark Next Generation Internet ETF (ARKW), the actively managed ETF that is famous for holding “story” stocks with little or no earnings (see figure1 below). Still the correlation with each one is not perfect so I used both to confirm Intermarket trades. Another possibility is that the Bitcoin could decouple with either one in the future. In any case the strategy was designed to detect this automatically, and ignore any Intermarket based conditions if the correlations turn negative. The system will continue to produce trades but if the decoupling persists I will provide updates. It is a long/short daily system and consists of three different trading signals:
A trend following strategy seemed the most appropriate to use in order to take advantage of the Bitcoin’s strong trends so the first condition included trend indicators. To increase the accuracy of the signals an Intermarket condition filtered out trades in the opposite direction of the most strongly correlated assets. Trend following systems, however, only produce trades in trending markets so, in order to increase the number of trades in sideways or choppy markets, I added two more signals which were deployed only in a sideways market or trading range. The system uses 4 different exit conditions to close open trades and limit drawdown to a minimum. The signals produced are highly profitable and accurate but produce few trades (about 1-2 trades per month) so the strategy is not appropriate for day traders or very active traders.
The BTC/USD trades 24/7 which means that a lot of it happens after the Bitcoin futures close. Also because of different volatility, margins, trading amount, commissions etc. it was not possible to design and backtest a universal system for trading both Bitcoin cash and futures so I decided to design 2 similar systems one for BTC/USD and one for Bitcoin Futures . You can see below the recent performance of each strategy. The Bitcoin package includes both systems. The strategy is available for the Tradestation, Multicharts, Amibroker platforms. It is not password protected so you can open it or change it with no problem. You can purchase it by clicking on the appropriate button below.
You can see above the last 3 year performance of the strategies applied on BTC, ETH and Bitcoin futures .The strategy was tested using Multicharts. The Amibroker system performance may not be exactly the same because of fundamental differences between the two programming languages. The commissions were 0.1% and all trades were entered next day at the open.
Figure 1.Chart of Bitcoin with QQQ (in blue) and ARKW (in black) from Septemner 2021 until March 2022. In the bottom windows you can see the 100 day correlation between BTC and ARKW and BTC and QQQ. Notice that the correlation between BTC and ARKW was as high as 98% in January of 2022!