#backtest

Pre-Summary Backtest → former resistance tested + trend integrity Following the prior breakout above 7150, stocks have now pulled back, forming a swing high and closing back below that level, triggering the stop referenced in the last update. From a cycle perspective, this pullback is occurring on day 19 of the daily cycle and is testing the integrity of the recent breakout. Price has so far…

Today, I backtest a Bitcoin momentum strategy.

Bitcoin is often dismissed as unpredictable, chaotic, and impossible to value, but for systematic traders, those very characteristics are an opportunity.

Unlike traditional assets, Bitcoin exhibits large and persistent price swings, both up and down, making it particularly well-suited for trend-following and momentum strategies. At least, that is how it has behaved in the past. As the asset matures, its characteristics may change.

What Is A Momentum Bitcoin Strategy?

Rather than trying to forecast where Bitcoin should go, momentum strategies take a simpler approach: they follow what the market is already doing.

When prices rise, they tend to keep rising; when they fall, they often continue to fall, a phenomenon well documented across many asset classes, especially stocks. The momentum tends to work for 1-12 months intervals.

In this article, we explore a simple Bitcoin momentum strategy built on the idea of capturing major trends while avoiding the worst drawdowns.

This is a strategy we published on our blog many years ago.

Bitcoin Momentum Strategy Backtest

We backtest the cash price of Bitcoin from 2015 until today (trading rules at the bottom):

It has performed well, but less so lately:

The 257 trades averaged a gain of almost 2%. Each trade lasted about 3 days and returned 44% annually. That is less than buy-and-hold, but with less risk of loss. Risk adjusted retirn was 321% annually. Max drawdown was only 22%.

Since IBIT was floated, the ETF that tracks Bitcoin has had pretty similar results to the cash price.

Bitcoin Momentum Strategy Trading Rules

The Bollinger Band Squeeze is a high-probability volatility trading strategy designed to identify potential price breakouts. By monitoring periods of low market volatility—known as a "squeeze"—traders can anticipate explosive price movements and high-momentum trends before they begin.

Financial markets move in cycles, alternating between quiet consolidation and sharp expansion.

The Bollinger Band Squeeze takes advantage of this rhythm by identifying moments when volatility contracts to unusually low levels, signaling that a significant move is likely imminent.

What Is the Bollinger Band Squeeze?

A squeeze occurs when the upper and lower Bollinger Bands narrow significantly around the price, reflecting a period of low volatility.

This compression is often described as a “coiled spring”: the longer the market stays compressed, the stronger the potential breakout.

Importantly, the squeeze does not predict direction, only that a large move is coming.

How the Strategy Works

The strategy typically unfolds in three phases:

Contraction: Volatility declines, and the bands tighten

Breakout: Price moves decisively above or below the bands

Expansion: Volatility increases, often leading to a strong trend

Traders look to enter positions when price breaks outside the bands, presumably with confirmation such as rising volume or momentum indicators.

Basic Trading Rules

A common ruleset might look like this:

Identify a squeeze (bands at historically low width)

Enter long on a close above the upper band

Enter short on a close below the lower band

Place a stop-loss near the opposite band

Use a risk-reward ratio (e.g., 2:1) or trail the trade

These rules help systematize what is otherwise a visually simple pattern.

Bollinger Band Squeeze Trading Strategy Backtest

Let’s backtest such a strategy. We make the following trading rules:

We use weekly bars (it seems to work better than daily)

We use 10-week data

We create a volatility band (10 weeks) that is the difference between the upper and lower Bollinger Bands

We create a 10-bar RSI value for the volatility bands

Exact rules at the bottom.

This strategy has worked well for consumer stocks. Below is a backtest we did for Pepsi (PEP):

Trading Rules

The buy and sell signals read like this:

The RSI of the volatility bands must be lower than XX

The close (of the asset) must set a new X-day high

We sell after XX

What is the turn of the month effect in stocks? The Turn of the Month effect, also known as the Ultimo Effect and the End of Month Effect, is a well-documented market anomaly where stock prices tend to rise during the final days of one month and the first few days of the next.

While many investors focus on the end of the month, research shows the momentum frequently spills over into the first three trading days of the new month.

The Strategy: How It Works

The standard trading strategy for this effect involves a low exposure time, with investors being in the market only about 33% of the time. The specific rules are:

Entry: Go long at the close on the fifth last trading day of the month.

Exit: Sell at the close of the third trading day of the new month.

Does it actually work?

Data from the S&P 500 since 1960 shows that this strategy is remarkably consistent. If you were only invested during these specific seven days each month, you would have achieved a 6.8% annual return (CAGR), slightly below 7.4% return of a “buy and hold” strategy over the same period (not including dividends).What Is The Turn of The Month Effect In Stocks?

More importantly, the strategy offers significantly lower drawdowns. For the S&P 500, the maximum drawdown was only 27%, compared to 56% for buy and hold. This effect has also been observed in other markets, including emerging markets, real estate stocks, and even Bitcoin.

Why Does It Happen?

While not proven beyond a reasonable doubt, the effect is likely driven by structural forces. These include:

Automated inflows: Regular capital contributions from savers and retirement accounts at the start of the month.

Institutional rebalancing: Fund managers adjusting their portfolios as the month concludes.

Dividend reinvestments: Large-scale reinvesting of monthly dividends.

The VIX indicator is a simple way to measure fear in the market. The VIX is often called the market’s “fear gauge.” But that label, while catchy, doesn’t fully explain why it can be useful for traders.

In this article, we describe the indicator and present a backtested trading strategy at the end.

At its core, the VIX measures expected volatility in the S&P 500 based on option prices. In simple terms, it reflects how much investors are willing to pay for insurance against market moves.

When uncertainty rises, option premiums increase, and so does the VIX. When markets are calm, the VIX tends to fall.

What the VIX Really Tells You

The key idea is this:

The VIX is not about direction, it’s about expectations.

A high VIX means traders expect large price swings. A low VIX signals complacency and stability.

Because of this, the VIX acts as a sentiment indicator:

Rising VIX → increasing fear and uncertainty

Falling VIX → calm markets and confidence

Importantly, the VIX tends to move inversely to the stock market. When stocks fall, the VIX often spikes and vice versa.

Why the VIX Is Useful for Traders

The real value of the VIX lies in how it reflects extremes in sentiment.

Financial markets are heavily influenced by psychology. In the short term, fear and greed often drive prices more than fundamentals.

This is where the VIX becomes interesting:

Extreme fear often coincides with market bottoms

Extreme calm often appears near market tops

In other words, the VIX can help identify when the market is stretched.

The Mean-Reversion Nature of Volatility

One of the most important characteristics of the VIX is that it tends to revert to its mean.

Volatility spikes are usually short-lived. Panic does not last forever. Over time, markets stabilize, and volatility declines again.

This makes the VIX primarily a short-term tool. It is especially useful for identifying temporary dislocations rather than long-term trends.

How Traders Use the VIX

Most traders don’t trade the VIX directly. Instead, they use it as a signal for other markets, especially equities.

Typical approaches include:

Looking for high VIX readings as potential buying opportunities in stocks

Using low VIX levels as a warning sign of complacency

Combining the VIX with other indicators like RSI or Bollinger Bands

Treating spikes in volatility as short-term opportunities

The underlying idea is simple: When fear becomes excessive, markets often move in the opposite direction shortly after.

A Few Important Limitations

Despite its usefulness, the VIX is far from perfect.

First, it is not a timing tool on its own. The VIX can stay elevated longer than expected during crises.

Second, it overlaps with many other indicators. In many cases, similar signals can be captured using simpler tools like momentum oscillators.

The VIX is best understood as a sentiment and volatility indicator, not a standalone trading system. Used correctly, the VIX can act as a valuable filter

Finally, the VIX reflects expectations, not actual outcomes. It tells you what the market fears, not what will happen.

Backtested VIX Trading Strategy

Let’s show you how you can make money on a short-term trading strategy using the VIX indicator.

The result is this for the S&P 500 from 1993 until today (trading rules under equity curve):

324 trades

Average gain: 0.6%

CAGR: 5.2%

Time invested: 14%

Max drawdown: 23%

Risk-adjusted return: 36%

The strategy is based on the following trading rules:

Go long the S&P 500 when the VIX breaks out on a new 20-day high and at the same time has a five-day RSI value of at least 65.

Have you ever looked at how stocks behave during Easter week? 🐣 Here’s a simple backtest worth noting:

Strategy Rules:

Buy at the close on the Friday before Easter holiday week.

Sell at the close on Holy Thursday.

Performance: Over a 66-year period backtest, this strategy has shown some really positive results, with an average gain per trade of 0.7%. Even better, that average has increased to 1.3% since the year 2000. It looks like the stock market tends to hold up pretty well during this holiday period.

Interesting seasonal strength during this period. Worth keeping in mind. 📈

so here’s a simple idea that goes against the usual “buy low, sell high” thing:

instead of trying to catch bottoms, you just buy strength.

that’s basically what momentum is.

What is momentum (in plain terms)?

momentum = things that have been going up tend to keep going up (for a while).

research shows that stocks that performed well over the past 3–12 months often continue to perform well over the next 3–12 months.

outside of that window, mean reversion tends to take over. but inside it, momentum dominates.

why this works (the 80/20 reality)

markets are weirdly concentrated.

about 20% of stocks drive basically all the gains

~80% do nothing (or go to zero over time)

only ~7.7% outperform the index by 500%+

so instead of trying to predict those winners, momentum just keeps you riding them when they appear.

it’s less about being right and more about not missing the few big ones

the actual strategy (very simple)

this uses monthly data and one indicator:

12-month simple moving average (SMA)

buy when price closes above the 12-month SMA

sell (go to cash) when price closes below it

that’s it. no complexity.

you can execute at month close or next open. and interestingly, the simple moving average beats the exponential one here.

what happens if you actually did this? (since 1960)

$100k → ~$8.2M

~6.9% annual return (vs 7.5% buy & hold)

so yes, slightly lower raw return…

but:

risk-adjusted return: ~9.8% (higher)

max drawdown: -26% (vs -55%)

only 39 trades total

avg winner ~+25%

avg loser < -5%

the trade-off

you give up a bit of upside in exchange for massively better downside protection

and psychologically, that matters more than most people think

bottom line

this isn’t about beating the market every year.

it’s about:

staying in during major trends

getting out during crashes

and letting a few big winners do the heavy lifting

momentum doesn’t predict the future

it just reacts to what’s already working

and quietly avoids what isn’t