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Executive Summary
- Perpetual futures contracts (Perpetuals) and Contracts for Differences (CFDs) serve as popular derivative instruments, sharing several similarities that make them appealing to traders looking for flexible, leveraged trading options in the cryptocurrency market. However, they differ in terms of contract structure, fees, and trading mechanisms, amongst others, making them different for traders to control risks.
- In this report, we demonstrate how to use popular technical indicators — Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI) — to build trading strategies, with the consideration of margin and trading fees, within the Crypto.com ecosystem. The trading strategy is evaluated based on data from October 2020 to October 2024.
- The strategy in the report combines the MACD crossover strategy and the RSI. According to historical data, the strategy could generate positive gains, which can be amplified along with the increase of leverage.
- While the strategy provides a structured approach to trading using technical indicators, it is essential to recognise its limitations and consider additional factors like market conditions, risk management, and trader psychology. To improve its effectiveness, traders may want to incorporate more sophisticated techniques, diversify their strategies, and continuously adapt their approach based on real-time market analysis and feedback.
1. Introduction
In the realm of cryptocurrency trading, Contracts for Differences (CFDs) and perpetual futures contracts (Perpetuals) serve as popular derivative instruments.
Contracts for Differences (CFDs): CFDs are agreements between a buyer and seller to exchange the difference in the value of an asset from the time the contract is opened to when it is closed. They do not have a fixed expiration date, allowing traders to hold positions as long as they wish, provided they meet margin requirements.
Perpetual Futures Contracts (Perpetuals): Unlike traditional futures contracts that have a specified expiration date, perpetual futures contracts do not expire. This allows traders to hold positions indefinitely without needing to roll over contracts. Perpetual futures are settled in cash, with periodic payments made based on the difference between the contract price and the underlying asset’s spot price, facilitated by a funding rate mechanism.
The similarities and differences between crypto CFDs and Perpetuals are shown below:
| Feature | CFDs | Perpetuals |
|---|---|---|
| Expiration | No expiration | No expiration |
| Position | Long and Short | Long and Short |
| Settlement | Cash-settled | Cash-settled/Crypto-settled |
| Order Type | Multiple types* | Multiple types |
| Leverage | Offered | Offered |
| Price Adjustment Mechanism | Closely mirrors market price | Funding rate mechanism |
| Counterparty | Broker | Exchange |
| Fee Structure | Funding feeBid-ask spreadLiquidation fee | Maker/Taker feeFunding feeLiquidation fee |
| Where to Access | Crypto.com Main App | Crypto.com Exchange |
| Feature | Expiration |
|---|---|
| CFDs | No expiration |
| Perpetuals | No expiration |
| Feature | Position |
| CFDs | Long and Short |
| Perpetuals | Long and Short |
| Feature | Settlement |
| CFDs | Cash-settled |
| Perpetuals | Cash-settled/Crypto-settled |
| Feature | Order Type |
| CFDs | Multiple types* |
| Perpetuals | Multiple types |
| Feature | Leverage |
| CFDs | Offered |
| Perpetuals | Offered |
| Feature | Price Adjustment Mechanism |
| CFDs | Closely mirrors market price |
| Perpetuals | Funding rate mechanism |
| Feature | Counterparty |
| CFDs | Broker |
| Perpetuals | Exchange |
| Feature | Fee Structure |
| CFDs | Funding feeBid-ask spreadLiquidation fee |
| Perpetuals | Maker/Taker feeFunding feeLiquidation fee |
| Feature | Where to Access |
| CFDs | Crypto.com Main App |
| Perpetuals | Crypto.com Exchange |
In addition, traders often use technical indicators (e.g., RSI) to identify trading opportunities for financial gains. Amongst the technical indicators, the Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI) are popular and usually provided in price charts. They are momentum indicators used to measure the speed at which the price of a security is changing, allowing traders to identify potential reversals, continuations, or trends.
The MACD indicator shows the relationship between two moving averages of a security’s price, typically the 12-period and 26-period exponential moving averages (EMAs). It generates an MACD line and a signal line, with crossovers between these lines serving as buy or sell signals. The MACD histogram reflects the difference between these two lines, indicating momentum strength.
RSI is one of the most widely used momentum indicators, measuring the magnitude of recent price changes to evaluate overbought or oversold conditions. The RSI ranges from 0 to 100, with values above 70 indicating overbought conditions and values below 30 indicating oversold conditions. Traders often look for divergences between the RSI and price to spot potential reversals.
In this report, we utilise the popular technical indicators — MACD and RSI — to build a trading strategy.
2. Methodology
2.1 Identify Signals
In this report, we extracted Bitcoin (BTC) data from October 2020 to October 2024 and constructed a trading strategy mainly combining MACD and RSI.
| MACD | RSI | |
|---|---|---|
| Strategy | Crossover strategy | Track the level of the indicator |
| Buy Signal | Enter a long position when the MACD line crosses above the signal line, indicating potential upward momentum. | RSI < 30 |
| Sell Signal | Enter a short position when the MACD line crosses below the signal line, suggesting a possible downward trend. | RSI > 70 |
| Strategy | |
| MACD | Crossover strategy |
| RSI | Track the level of the indicator |
| Buy Signal | |
| MACD | Enter a long position when the MACD line crosses above the signal line, indicating potential upward momentum. |
| RSI | RSI < 30 |
| Sell Signal | |
| MACD | Enter a short position when the MACD line crosses below the signal line, suggesting a possible downward trend. |
| RSI | RSI > 70 |
2.2 Fees and Other Constraints
To better simulate the trading in real-world trading scenarios, we also consider the potential fees and constraints to control the risks. All the conditions are from the related products provided by Crypto.com:
| CFDs | Perpetuals | |
|---|---|---|
| Trading Fee | 0 | Quantity x Entry Price x Derivatives Trading Fee Rate (%) |
| Margin Call | Margin Balance < Used Margin Margin Balance = CFD Wallet + Unrealised PnL – Fee Reserves | Margin Balance = Positive cash balance on eligible collateral tokens + negative balance on all tokens + unrealised PnL — Fee Reserves |
| Liquidation Fee | 2% of notional amount that was liquidated | 2% of notional amount that was liquidated |
| Fee Reserves | Potential liquidation fee | Potential liquidation fee |
| Stop-Loss Price Ratio | N/A | Users define |
| Take-Profit Price Ratio | N/A | Users define |
| Trading Fee | |
| CFDs | 0 |
| Perpetuals | Quantity x Entry Price x Derivatives Trading Fee Rate (%) |
| Margin Call | |
| CFDs | Margin Balance < Used Margin Margin Balance = CFD Wallet + Unrealised PnL – Fee Reserves |
| Perpetuals | Margin Balance = Positive cash balance on eligible collateral tokens + negative balance on all tokens + unrealised PnL — Fee Reserves |
| Liquidation Fee | |
| CFDs | 2% of notional amount that was liquidated |
| Perpetuals | 2% of notional amount that was liquidated |
| Fee Reserves | |
| CFDs | Potential liquidation fee |
| Perpetuals | Potential liquidation fee |
| Stop-Loss Price Ratio | |
| CFDs | N/A |
| Perpetuals | Users define |
| Take-Profit Price Ratio | |
| CFDs | N/A |
| Perpetuals | Users define |
3. Results
Based on the trading strategy defined in section 2.1, the visualisation of the indicators are shown below:
We also demonstrate the buy and sell signals given the criteria of the indicators:
Given the trading signals and constraints in CFDs and Perpetuals (excluding the funding fees), the performance of trading a BTC/ETH pair with 1x ~ 10x leverage is shown below:
4. Limitations and Caveats
The trading strategy outlined above has several limitations that can affect its performance and reliability in real-world trading scenarios. Below are some key considerations:
Simplicity of Indicators
Limited Indicators: The strategy relies solely on MACD and RSI, which may not capture all market dynamics. Market conditions can rapidly change, and a more robust set of indicators might be needed.
Lagging Indicators: Both MACD and RSI are lagging indicators, meaning they may react too slowly to fast market movements, leading to missed opportunities or late entries/exits.
Ignoring Market Context
Lack of Fundamental Analysis: The strategy does not consider fundamental factors that can impact crypto prices, such as news, regulatory changes, or macroeconomic trends.
Market Sentiment: The model does not account for market sentiment, which can drive price movements beyond technical indicators.
Fixed Stop-Loss and Take-Profit Levels
Static Parameters: The stop-loss and take-profit levels are fixed percentages. This approach does not adapt to changing market volatility or price action, which could lead to unnecessary losses or missed profits.
Market Conditions: In volatile markets, fixed stop-losses may result in premature exits, while dynamic conditions might warrant tighter or looser levels.
Risk Management
Leverage Risks: The use of leverage can amplify both gains and losses. For example, a small adverse price movement can lead to significant losses, especially in a highly volatile market like crypto.
Margin Calls: The strategy includes checks for margin calls but does not account for rapid price fluctuations, which could lead to immediate liquidation of positions.
Transaction Costs
Trading Fees: Although the strategy tries to include as many as possible foreseeable fees, it does not factor in fees accrued in dynamic scenarios, such as funding fees.
Impact of Frequent Trading: If the strategy generates many trades, cumulative fees can erode profits.
Backtesting Limitations
Overfitting: If the strategy is backtested on historical data without proper validation, it may be overfitted to that data and perform poorly in live markets.
Data Quality: The accuracy of backtesting results relies heavily on the quality and granularity of historical data.
5. Conclusion
In this report, we built a simple strategy with the popular MACD and RSI technical indicators. The investment results are quantitatively demonstrated with positive APR ranging from 1.5% to 14.4%, with corresponding leverage of 2x ~ 10x in the period from October 2020 to October 2024. As a comparison, holding BTC directly can generate 108% APR during the same period.
While the strategy is easy to implement and provides a structured approach to trading using technical indicators, it is essential to recognise its limitations and consider additional factors like market conditions, risk management, and trader psychology. To improve its effectiveness, traders may want to incorporate more sophisticated techniques, diversify their strategies, and continuously adapt their approach based on real-time market analysis and feedback.
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Authors
Crypto.com Research and Insights team
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