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Today we are going to look at Ethereum again, but this time on the daily data level and we are going to consider an upcoming “signal.” The signal is a so-called Golden Cross and this is simply where a shorter moving average passes up through a longer moving average.
The implication is that near term trend is accelerating faster than longer term trend and its generally taken as a Buy signal. You can use pretty much any moving averages for this signal but a common set is 5 and 20. And the technical analysis textbooks everyone rushes out to buy when they decide to give up their day job and make it big as a trader tell us this is a great signal.
So is it a great signal? Well we can do a simple test. Download the open-high-low-close (OHLC) and moving average (MA) data onto an excel sheet. Sort data from oldest date to newest, create a new column and ask the MA columns this question =IF(AND(H5<G5,H6>G6),1,””) (H5 is yesterday’s 5 MA, H6 today’s; G5 is yesterday’s 20 MA, G6 today’s).. and then in a new column using the next open find out what the price change was over say 10 days whenever the signal appeared. You should find this out: that from 1 Jan 2020 (near the start of the data) and 1,006 trading days, the signal came 22 times and the average percent change was 0.33%. So in that sense it’s a winning system. kind of.
But then a bit more digging reveals that only 11 returns were positive. And yet more digging reveals that the MaxLoss was 21%. So far, not so great. And finally when you get the average return for all 10 day phases regardless of signal the return is 3.66%.
The takeaway here is: you cannot rely on moving average crossovers. I will tell you what moving averages really are about one day soon.