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Tradagon's BCalc for Bitcoin: Pure, Unadulterated Crowd Behavior at Play

January 22, 2018

 

A fully automated Bitcoin trading strategy on the horizon

 

Tradagon is a financial technology company engaged in (1) research and development (2) proprietary trading and (3) providing actionable alpha signals to financial institutions for trading (data provider).

 

In short, we’ve built a proprietary, all-new trading methodology and technology called Behavioral Calculus™ or BCalc™. BCalc captures the essence of price action and delivers a whole new level of predictive power for the markets. It applies to multiple asset classes, including equities, fixed income, Forex, commodities...and now digital currencies.

The fundamental paradigm that underpins BCalc is that of crowd behavior.

 
CROWD BEHAVIOR AS A CORE DRIVER OF PRICE ACTION

 

Human beings are wired to recognize and react to crowd behavior, We see this behavior everywhere, from socio-political movements to fads to actual, physical crowds. Tradagon believes that markets are no different -- crowd behavior is a core driver of price action.

We've identified and quantified a key concept underlying crowd behavior that we call Confluence. There are moments in time when everyone and everything seems to come together, and this Confluence triggers crowd behavior. As more and more individuals start taking notice of the behavior of the crowd, it creates feedback loops; the confluential event then morphs into an ongoing confluential trend that persists until the energy dissipates. This is exactly what happens in price action, and very often there is no real explanation for even major moves -- even after the fact -- which is a hallmark of crowd behavior.

 

BCALC FOR BITCOIN

 

Bitcoin has several unique characteristics that make it intuitively appealing for us at Tradagon. And, to be clear, we are using the term “Bitcoin” as somewhat of a proxy for cryptocurrencies, because it has the most readily available and tradable data given its popularity and its recent debut on the public exchanges.

 

It’s easy to buy into the fear, uncertainty and doubt that has permeated conversations when it comes to bitcoin. It’s also easy to buy into the hype. We were on the fence for a while until we came to the stark realization that Bitcoin price action is as good as it gets when it comes to deriving predictive power from price movements. Why? Because it’s purely sentiment driven, which makes it a perfect match for our universal model of crowd behavior. To elaborate:

 

  • Bitcoin is a special, net new phenomena untethered to fundamentals. Bitcoin is not a company that has earnings (and earnings hype) and could lose profitability and fail. Traditional valuation methods like discounted cash-flow, PE ratios, etc. obviously don’t apply. Is it like the tulips craze of the 1600s? Probably not, since it is not pure speculation driven by false truths. Bitcoin is exploding in value primarily because it is a never seen before financial invention that has vast potential to effect change at a very fundamental level.

  • Traditional currency valuation models don’t apply. Unlike other currencies, like GBPUSD, for example, Bitcoin is not intertwined with government intervention, policy moves, interest rates, trade imbalances, or other currencies. This could possibly change in the future with regards to Bitcoin’s relationship to other altcoins, and we may eventually even see Bitcoin pricing models with valid theoretical underpinnings. As of now, however, valuations remain highly uncertain with sentiment being the main driver.

  • It is both scarce and in high demand. With a limited supply of units, Bitcoin is necessarily a scarce asset, and its vast potential is driving increasing demand. This has created a strong upward bias in the price trajectory. At the same time, the uncertain valuations continue to trigger strong corrections. BCalc is perfectly suited to exploit all this sentiment driven volatility.

 

The main point here is that barring any massive technological failure that may threaten the future of Bitcoin, it will prove to be a welcome addition to our product portfolio since it’s uniquely amenable to analysis with our crowd behavior model. That’s why we’re super excited to be launching our new fully automated BCalc Bitcoin strategy.

 

BCALC BITCOIN: TRADAGON’S FULLY AUTOMATED BITCOIN TRADING STRATEGY
 

We’ve achieved a significant level of predictive power and consistently delivered alpha through our automated trading strategies. But our BCalc Bitcoin Strategy is exponentially more performant, with weekly returns of 25% (unlevered). The BCalc Bitcoin Strategy is:

 

  • Fully Automated.  Always-on strategy that trades 24x7 without human intervention or emotion

  • Always-in. Binary, long-and-short trading strategy that works with intraday Bitcoin data

  • Very Active. Intraday strategy that can make up to 10 trades/day in Bitcoin futures on average

 

Check out the strategy’s backtest performance to date with CME’s Bitcoin index data and Bitcoin futures data below.

 

 

Fig. 1. Bitcoin Index Backtest (above):

 

BCalc Bitcoin Strategy applied to 37 weeks of BRTI 5-minute bars. The strategy made 17 trades/day on average.

  • BCalc’s weekly rate of return for the period was 25% (unlevered) vs. 7% for Buy&Hold.

  • BCalc’s average end-of-day drawdown was 2% vs. 10% for Buy&Hold.

 

 

Fig. 2. Bitcoin Futures Backtest (above):

 

  • Exact same BCalc Bitcoin Strategy applied to 3 weeks of BTC Jan ’18 5-tick bars. (We’re using tick bars here since the futures market is still pretty thin.) The strategy made 8 trades/day on average.

  • BCalc’s weekly rate of return for the period was 26% (unlevered) vs. -6.6% for Buy&Hold.

  • BCalc’s average intraday drawdown was 5%; the Buy&Hold drawdown maxed out at 40% and is still recovering.

 

VISIT WWW.TRADAGONGROUP.COM TO LEARN MORE.
 

Thanks for reading,

 

The Tradagon Team

 

*NOTE: Trading has risks. Past results are not necessarily indicative of future performance.*

 

 

 

 

 

 

 

 

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