Just in the past three months bitcoin has gone from $1500 to $3000 to $2500 to $1800 to $2900 to $2500 to $3400. You'd make more with a lot less risk just waiting for a dip and buying.
I've been testing this out over the past 6 days with $500 to see how it would actually work while keeping my current amount in. I've been working a bit more on the micro level, but it still is pretty consistent in its volatility (lol).
So far I have a 4.6% total return on trying to capitalize on the volatility. That's much less than if I had just held at the original buy. I'm going to keep doing it though to see how it works in long term flat and drop periods. When you hold yourself to rules, it also decreases maximum losses too. I see the strategy as a great way to make safe money relative to crypto.
Right now if the volatility and my returns hold for even just two years, it could be going from $500 to over 100K. It makes it really tempting not to increase the amount I'm playing with even slightly, but I have yet to see how the strategy fares on long term drops. I do have confidence it will perform well on long term flat periods though.
I've also been testing out the volatility with automated trading scripts, trading on the dimes and nickles. Unlimited amounts of trades with no transaction fees and this much volatility is a dream land. I started trading 4 months ago and turned 10k into a little under 75k. I was a bit late to the game, but I can't imagine how much some of the other automated traders are making.
A few notes on your comment here...keep in mind none of this is intended to be patronizing, in case my tone comes across that way. I just like talking about this.
> So far I have a 4.6% total return on trying to capitalize on the volatility. That's much less than if I had just held at the original buy.
If you compare the returns between those two strategies (buy and hold vs mean reversion), make sure you include comparisons of their beta profiles. Their risk measures are going to be very different.
> When you hold yourself to rules, it also decreases maximum losses too.
Speaking of rules, do you have a maximum tolerable drawdown for the strategy, or a number of consecutive losses at which you stop loss or retire the strategy? In order to add more rigor to your work (and so you know there is an element of empirical strategy here instead of just luck), you should conceive a set of priors for the strategy that allow you to set a hypothetical win rate. If you deviate too far from the win rate, or too far from a drawdown as mandated by your risk management rules, you should shut down the algorithm pending a review of its inputs and retire it if it's no longer working.
> Right now if the volatility and my returns hold for even just two years, it could be going from $500 to over 100K.
There are a few hypotheses implicit to your thought here:
1. Market volatility for the target cryptocurrency will remain functionally stable for the next two years,
2. Your strategy will remain functionally stable for the next two years,
3. There is sufficient liquidity to allow you to continually compound your trading strategy's assets with its returns for the next two years, from an initial outlay of $500 to over $100,000, without hitting capital constraints along the way.
Those are all testable hypotheses (which, technically, you're involved in doing), and I can't tell you if they're realistic. I wouldn't count on all three of them being correct though.
Appreciate the post/points! I'm not an expert in this at all myself. Frankly, all of this is picked up from less than 3 years of various small tests in various investment strategies. I welcome all advice/thoughts on this. As said, this is an experiment truly.
Could you elaborate on the beta profiles part? I can't say I'm very knowledgeable there. Assume I know very little about formal risk measurements.
As far as the rules I referenced, I have a max single loss but have yet to set a stop loss/retirement point. This strategy evolved pretty loosely based on the idea of capitalizing on the volatility and part of the reason it's an experiment is that I'm okay with losing the $500 if it comes down to it. It's still incredibly risky, which I am aware of. Part of the reason I'm hesitant to put in a retirement point is that I can see losing a significant chunk in certain scenarios (this algorithm is not yet automated, though it very well may be soon, which would mitigate this) that would still be less than the long term gains. For example, given the returns, the strategy could still perform well taking occasional hits of say 20% in one day infrequently (read a few times a year). If/when this algorithm is automated, I will certainly be building in stop loss constraints.
Fully agreed on the hypothesis and not counting on them at all, but I think they aren't incredibly unrealistic. I carefully chose two years in the post above because I don't see the volatility lasting much longer than that. Right now the strategy is incredibly liquid, and I don't see that part of it changing given the micro focus. No hold so far has lasted longer than 24h, and when this is more formalized, I see a hold time limit (as a function of loss/gain) being used to keep the lost opportunity cost down. I think the tuning will likely occur mainly over the next month or two, and after that I'll likely either stop or let it run.
Overall, I would still categorize this much more as a personal test than a scientific one. We'll see how formal it gets.