Hello this is Mark from Tradinformed.com and welcome to this video on How to Trade Bitcoin
Using a Breakout Strategy
In this video I will be demonstrating
firstly, the breakout strategy
then I will show you how we can test this strategy using historical data and
Finally I will be showing you the results of the test of this strategy
Before I go any further I would like to remind you that if you like this video
Please hit the Like button and if you want to get more content like this. Please remember to Subscribe
So once again
in early 2018
Bitcoin is all over the financial news and in fact all over all of the news
For the reason that it has now fallen well below
$10,000 it's in fact today below
$9,000 and this is
From a market that was almost touching
$20,000 just over a month ago
So for traders who like lots of action and volatility this has been a fabulous market
But starting from today or from any point in the future how can we trade Bitcoin:
Safely, profitably, and without a high risk of blowing up our account
Now I have already recorded a video about this topic. In that other video
I look at the trading Bitcoin using the Aroon indicator and
Which is another form of breakout indicator
And there is a link on the screen if you would like to have a look at that video
But the breakout strategy that I'm going to show today is even simpler, this uses channel breakouts
Sometimes known as Donchian bands
Or the Turtle Breakout System
We are basically looking for a close or even just a breakout from recent highs or lows
Looking back over the price history of Bitcoin it has tended to move quite strongly
From one range to another and this is the sort of market that can work very well with breakout
strategies
So quite simply the strategy uses channel breakouts and the way I am going to
demonstrate that strategy or test rather the results of that strategy is using a
Excel spreadsheet
Now that is shown on the screen at the moment and over here on the left I have
Bitcoin price data
going back to
2014 this isn't a mature market, but we've got price data here going back
About three and a half years
all I have got in these next columns here are recent highs and recent lows and
They are set as a variable and as you'll see later
the reason I have set this as a variable is so we can test different time periods
Okay, so this is nice and simple if you are doing this formula yourself in Excel you would just use the max and the min
Formula I've done it a slightly different way for the reasons that I've just explained
Over here to the right you can see the rest of the spreadsheet
This is a Tradinformed backtest spreadsheet
Which is a template for testing trading strategies using Excel and
If you'd like to be able to test your own trading strategies and want more information about these
There is a link on the screen at the moment, so please check that out
Okay, so this trading strategy is simple as you like maximum and minimum. There's nothing else to it
Now to have a look at what the strategy is doing we can click over here now
This is the Results Tab of this particular spreadsheet. You could certainly do this yourself in Excel
There are advantages to using a Tradinformed backtest spreadsheet, and one of those is we can
Try different things like profit targets and stop losses, which are built in to the spreadsheet
Very simply we're using a notional starting capital of
$100,000 and if I skip down here
In fact I'm going to skip down right to this on the length of the Donchian bands
This is probably the most important one and a thing that I think most people will be interested
I've said it here to just five periods now I'm using the daily timeframe
this strategy could certainly
Theoretically work on lower timeframes twelve hours, eight hours, four hours, even one hour
Although I'm not testing those today. I'm today. I'm using just the daily timeframe so
I can change this cell. This is a variable cell here
And as you see every time I change this number here the results
update over here
So I thought it was quite interesting to start with
Very low this would be for most markets five day breakouts would be completely useless
Because of how much noise and other activity would make this a losing proposition
But historically the extreme
volatility of breaking of
Bitcoins has made even this a profitable strategy historically
Now I'll get this up to the sort of range that most people would expect for a breakout strategy
We can see here the principal difference is we're getting fewer trades in fact
We've only got 50% winning trades, but for a trend following breakout strategy
This is an excellent winning ratio
I could even push it all the way up to 55 and we can see here that we actually
Although we've only got a small sample of trades. We do push it up over 50% of winning trades
We've also got a very nice net profit now the few things few of the calculations here, we've got
Compound annual growth rate, and we've got a maximum drawdown now. This is the underlying market and we can see to date
with the
Huge parabolic rise up here and then the
Sickening swing back down for people who invested up here anyway back down here. We're up
Over a hundred and fifty percent for the compound annual growth rate. This is despite this fall here. So this is a
staggering
Compound annual growth rate, but we cannot go back to here. We cannot rewind time can only work with what we've got so
By any standards annual growth of 50% of capital is pretty decent
If I can bring this back down we see we have a lower anual growth rate
But max drawdown stays stayed pretty consistent
Now for me, max drawdown is one of the most if not sometimes the most important statistic that I'm looking for in a trading strategy
because for the simple reason that if drawdown gets too high
Most or even all of us are going to bail out of a strategy
it's very very difficult to keep trading a strategy in the face of losing trades a succession of losing trades and
especially large losing trades
So 21 percent compared to 69 percent is pretty good
It takes a very staunch investor to withstand
70% drawdown and still stay in the game
Now there is more in this spreadsheet one of the things that we can do is
One of the things that I programmed into it is at the moment. I'm using a Close basis now
this is a very very easy way to run the strategy for the simple reason that
Well Bitcoin doesn't really have an official close price of course because it's traded around the world
But it means that
Anybody can trade it they can check the prices once a day whenever they think is appropriate or whenever it fits in with their
lifestyle and
enter and exit positions at that time
So there is no requirement to be at a trading desk monitoring the market you can simply switch it on
At a consistent time and enter or exit as appropriate
but I then put in another feature here, and this is entering on high or low this takes a little bit more work, but
It does make a small difference we can see here
Now the difference here is instead of entering
Whenever we want on a close basis we're actually setting
market limit orders and
Market stop orders rather and we are getting into a price when it breaks out literally at the moment when it breaks out
as
You can see and if I flick around to a few others
It does make a difference for the profitability
Based on historic data and in fact in particular for the low timeframes it makes a huge difference
What I would say as a
counsel or a slight warning against this is if you're entering using stop orders on a high-low point
There is a greater risk of slippage
Which is not reflected at the moment in this spreadsheet?
although you could very easily put in a cost of
Trading to include how much it cost us our broker is charging us and how much we think
slippage will affect our trades
So if I take that out we can see that
We go back to 55 get a very high net profit
But as soon as I start to put in cost of trading it has very little effect at all
Because for the simple reason we're not entering many trades
Now there is the strategy. It's as simple as that
I'm going to show you one of the feature of this spreadsheet, and that is if you want to analyze different scenarios
All we can do is if we're looking at the 55 donchian bands. Just click here, and we've got a copy here
So I can have a look at that and I can click back here, and I might compare it here to the 5
So we have a way there of comparing our strategies you can see
Quite easily difference in profit factors but also significantly a big difference in the number of trades
so there is the
Way to trade Bitcoin using a breakout strategy
I have presented the results that I've got based on the historical data and also shown how you can test your own
version of this strategy I
Hope you enjoy this I hoped you enjoyed this video if you did, please hit the Like and Subscribe
buttons and also for more information about trading the financial markets, please go to
www.tradinformed.com