You know what? People think they can make 1% day compounded as profit. This is usually what people look for when they start learning about trading bots, but the reality is that this is almost impossible when you are just starting.
To put this into perspective: say you start with 1,000$. By the end of the year without any losses, you would have
1000$ * 1.01^365=37,783$. That’s a 3,778% increase on your investment, an awesome profit.
Now, it is safe to assume that you can’t do this as its unrealistic, meaning that if anyone is offering you 1% a day compounded gains then it’s a hoax or too good to be true. Trust us, that profit margin is crazy.
The important part of that exercise is that compounding gains is actually the “magic” of finance. Now, say you start with 10,000$ and over 10 years you manage to do 10% a year. We can calculate this with
10000$*1.10^10=25,937$ which is roughly 259.37% increase.
Taking this in consideration and knowing that the SP500 has returned, on average, 8.18% per year, then you would have done incredibly well. Why? Because most professional fund managers have not managed to beat the SP500 in the long run.
But crypto is different than stocks (even in profit)
It is indeed, but we should have realistic goals when we get into trading crypto or we wont be here in the long run. In order to make consistent profits over the long run, without relying on luck of buying BTC in 2010 or ETH at ICO price, we should be using a framework and mindset in order to actually achieve realistic goals.
Let’s analyze the cryptocurrency market. We usually enjoy comparing our trading algorithms to either BTC or a crypto index like the CCI30.
To take it into perspective, let’s take 2018 as our starting point. If you have been trading since 2018, take the initial amount of money you had and compare it to the amount you had by the first of January of 2019.
This will give you an absolute idea of how much money you made or loss in % wise. This, assuming you did not pay taxes on it nor withdrew anything to pay any living expenses.
What is cumulative returns?
A cumulative return on an investment is the aggregate amount that the investment has gained or lost over time. Note that it’s independent of the period of time involved.
We can calculate it with the following formula:
(Current Price of Asset - Original Price of Asset)/(Original Price of Asset)
Let’s go with a real example. Say you bought Bitcoin on December 31 2017. your cumulative returns on that bitcoin by December 31 2018 would be:
(3702-13716)/(13716)=-0.73 which is
How to assimilate this?
If you made more than -73%, you beat the market. If you were above 0%, not only did you beat the market but also made profits.
Let’s compare this performance now using a chart and comparing it against different trading strategies. Don’t worry, we’ll teach you how to put these in place using freqtrade later.
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Ideally you want an equity curve that grows slowly with little draw down, this would be something like the strategy 2 outlined in the chart. Even though strategy 1 might seem very interesting, it might rely on higher volatility of BTC.
In addition, it might contain multiple biases, as crypto markets usually trend up and this strategy relied on assets that went up in that period.
We’ll implement strategy 1 in another blog post as the idea was already shared in our private freqtrade community. What are your thoughts on this? Let us now in the comments below!