5 Popular Crypto Trading Strategies and How to Backtest Them
Most crypto trading strategies are variations on five old ideas. None of them is secret and none of them works in every market, which is exactly why each one needs testing on past data before any money is involved. Here are the five, in plain terms, with the specific thing to check when you test each.
The five ideas
- Trend following. Buy what is already rising, sell when it stops. A moving-average cross on bitcoin is the classic version. Test for whipsaws: the long sideways months are where this one bleeds.
- Mean reversion. Buy what has fallen unusually far, expecting a bounce. Test it through one real crash - the strategy that buys every dip meets its match in a trend that does not stop.
- Breakout trading. Buy when the price clears a level it has failed at before. Test how often the break fails and reverses, because that is the cost of the whole approach.
- Dollar-cost averaging. Buy a fixed amount of ether or bitcoin on a schedule, ignoring the chart. Test it as the benchmark for everything else: if your clever rule cannot beat it after fees, the rule is not clever.
- Grid trading. Place small buys and sells at set intervals and harvest the chop. Test it in a market that trends hard in one direction, where the grid ends up holding only the losing side.
How to test any of them
The method is the same each time. Write the rule so precisely that a machine could follow it, including when you exit. Pick a data window with a rise, a fall and a flat stretch. Turn on realistic fees and slippage. Then look past the headline return at three numbers: maximum drawdown, the number of trades, and how the result changes if you nudge a setting - a strategy that only works at exactly 14 periods and breaks at 13 has been fitted to the past, not discovered in it.
Think of it like testing a recipe at home before cooking for guests: the point is to find out where it fails while the stakes are nothing. Pick one strategy, test it on a single pair, and resist the urge to adjust it until it looks good. The mechanics - tools, data sources and fee settings - are covered in how to backtest a crypto strategy, and one strategy is worked through in detail in the RSI divergence strategy.