Multi Indicator based Hierarchical Strategies for Technical Analysis of Crypto market Paradigm

Abstract

The usage of technical analysis in the crypto market is very popular among algorithmic traders. This involves the application of strategies based on technical indicators, which shoot BUY and SELL signals to help the investors to take trading decisions. However, instead of depending on the popular myths of the market, a proper empirical analysis can be helpful in lucrative endeavors in trading cryptocurrencies. In this work, four technical indicators namely Exponential Moving Averages (EMA), Bollinger Bands (BB), Relative Strength Index (RSI), and Parabolic Stop And Reverse (PSAR) are used individually to devise strategies that are implemented, and their performance is validated using the price data of Bitcoin from yahoo finance for 2018-22, individually for each year and all the five years consolidated to compute the performance metrics including Profit percentage, Net profitability percentage, and Number of total transactions. The results show that the performance of strategies based on trend indicators is better than that of momentum indicators where the EMA strategy provided the best result with a profit percentage of 394.13%. Further, the performance of these strategies is analyzed in three different market scenarios namely Uptrend/Bullish trend, Downtrend/Bearish trend, and Fluctuating/oscillating markets to analyze the applicability of each of these smart strategies in the three scenarios. Based on the insights obtained from the analysis, Hybrid strategies using multiple indicators with a hierarchical approach are developed whose performance is further improved by imposing constraints in a Downtrend market scenario. The novelty of these algorithms is that they identify the scenario in the market using multiple indicators in a hierarchal approach, and utilize appropriate indicators as per the market scenario. Four strategies namely, Multi indicator based Hierarchical Strategy (MIHS) with EMA9, Multi indicator based Hierarchical Strategy (MIHS) with EMA7, Multi-Indicator based Hierarchical Constrained Strategy (MIHCS) with EMA9, and Multi-Indicator based Hierarchical Constrained Strategy (MIHCS) with EMA7 are developed which give profit percentage of 154.45%, 437.48%, 256.31%, and 701.77% respectively when applied on the Bitcoin price data during 2018-22.