Our introduction to trend-following posts on Zerodha Varsity (Part I, II, III, IV and V) used tradfi instruments to build a basic model. What if we applied the same principles on crypto assets?
To keep things simple, we’ll pick only two assets: BTC and ETH. The portfolio is evenly split between the two. Since crypto markets are 24/7/365, we’ll divide each day into 24 hour slots and construct a daily series based on the closing prices at each hour. The portfolio is further split into 24 parts each. Each position is an average of a binary trend signal.
Individually, trend-following boosts the Sharpe ratio of each asset.
You may not have captured the absolute highs but you would have avoided the steep drawdowns.
They are stronger together than individually.
Needless to say, leverage in this scenario would be fatal.
Code on github.