Building and Backtesting a Systematic Trading Strategy based on Technical analysis

This thesis investigates the potential of a systematic trading strategy, based on technical analysis indicators, to outperform the cryptocurrency market in terms of risk adjusted returns. The research focuses on the development and enhancement of a trading system applied to the cryptocurrency market. Employing a semi-systematic approach, the study begins with generating trading strategy ideas derived from personal market experience and knowledge. These ideas are then systematized into clear, objective entry and exit rules, followed by rigorous backtesting against historical data. The methodology uses the Relative Strength Index (RSI) for entry signals and the Average True Range (ATR) to set flexible stop-losses based on market conditions. The strategy is tested on ten major cryptocurrencies, with results analyzed based on various system parameters and market conditions. Empirical and statistical validation demonstrates that the improved trading strategy significantly outperforms a passive "Buy and Hold" approach. The system achieves higher average returns with nearly half the volatility, leading to a superior Sharpe ratio compared to the benchmark. These findings indicate the possibility of outperforming the cryptocurrency market through active management using technical analysis. The implications of this study challenge the Efficient Market Hypothesis (EMH), as it demonstrates the potential for achieving higher risk-adjusted returns through systematic trading strategies. This study provides valuable insights for traders and investors seeking to optimize their strategies in the volatile cryptocurrency market, highlighting the viability of systematic trading based on technical analysis.