False Bitcoin Breakout Strategy: Exploit Opportunities in Sideways Markets

Given the recent movement of Bitcoin (BTC), which could be described as sideways, in this article we will examine the possibility of using a strategy rarely applied to this market: the false breakout.

What is a false breakout?

A false breakout is a situation in which a breakout occurs at a sensitive level, such as the previous session’s high, and then the market decides to reverse course and retrace its steps, forming another breakout, but on the side opposite.

An example of this model is shown in Figure 1. This type of strategy should tend to work when the market is not particularly dynamic and there is no clear trend. Much like 2023, which started with a lot of momentum and directionality, but became less volatile and expansive from mid-September onwards.

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Figure 1. Example of a false breakout on the low of the previous session

Rules for a Hypothetical Trading System Based on the False Breakout of Bitcoin (BTC)

THE strategy that you are going to use will wait for a false breakout at the previous session low (one bar close below the low) and when a breakout occurs at the previous session low (one bar close above the low) , the system will have all the conditions to enter a buying position.

The transaction is closed on another false breakout, this time on the high of the previous session (Figure 2).

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Figure 2. Example of false breakout on the high of the previous session

This basic logic could be applied over multiple time frames and, of course, as the time frame changes, so will the number of signals the strategy could provide.

To give a practical example, it will be much easier to observe false breakouts on fast time frames, like 5 or 15 minutes, than on a time frame. To be verified, a false breakout must wait until a bar closes above or below the considered entry level. Therefore, as the width of the bar increases, the total number of transactions made by the system will decrease.

Performance report of a trading system based on the false breakout of BitCoin (BTC)

The following figures show that with a fixed size of $100,000 per trade, the best results are achieved over a period of 15 or 60 minutes. Nevertheless, all four simulations (5M, 15M, 30M and 60M) show positive results with increasing equity lines (Figures 3-4-5-6).

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Figure 3. BitCoin (BTC) 5-Minute False Breakout Strategy
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Figure 4. 15-minute false breakout strategy for BitCoin (BTC)
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Figure 5. Fake 30-minute breakout strategy on BitCoin (BTC)
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Figure 6. Fake 60-minute breakout strategy on BitCoin (BTC)

The biggest profit is made with the strategy developed over a period of 60 minutes. In this case, the signals provided by the system are weaker and positions remain open longer than in narrower time frames, which inevitably increases the average trade and overall profit made by the strategy.

It was nevertheless decided to continue developing the 15-minute strategy, which offers a better compromise between the total number of transactions and their duration (Figures 7 and 8).

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Figure 7. Average trade false breakout strategy on BitCoin (BTC) at 60M
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Figure 8. Average trade false breakout strategy on BitCoin (BTC) at 15M

The average trade of the 15-minute strategy is good and amounts to $476 or 0.47% of the value of an average trade.

However, the stock line remains quite irregular and very volatile, even though it has increased over the years since 2016.

Optimizing a Trading System Based on False Breakouts of BitCoin (BTC)

In an attempt to improve the shape of the profit curve, a condition is introduced which looks for false breakouts only in certain well-defined situations. Using a list of proprietary patterns, it turns out that this type of trading is most suitable after witnessing 5 days (one week of trading) in which the market took a clear and decisive direction. For example, if you group the daily bars of the last 5 days and the body (i.e. the absolute value of the difference between the opening of 5 days ago and the close of the previous day) is at least 0.5% higher than the total range of the last 5 days (the high of 5 days ago subtracted from the low of yesterday), then the strategy will attempt to make false breakouts.

Operational reversals after a well-defined short-term trend may be the way to go, as we are more likely to see rebounds after a trending and conviction phase.

In the following figures (9 and 10), we can see how the model improves the shape of the equity line and increases the average trade.

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Figure 9. False breakout of the equity line strategy on BitCoin (BTC) at 15M after model insertion
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Figure 10. Mean false breakout of the trading strategy on BitCoin (BTC) at 15M after model insertion

The total profit also increases compared to a no-trend situation, so entering a reversal only after witnessing a strong trend over the last 5 days is certainly more practical than making all the false breakouts one might witness on the market.

Added Stop Loss to Trading System Based on False Breakout of BitCoin (BTC)

At this stage, all that remains is to add a stop loss to this strategy which, although it already presents a sort of trade exit (false breakout on the high of the previous session), lacks an exit standard in the event of a sharp increase. loss.

Figure 11 shows how the results vary since the stop loss varies from 0, a situation with no stop loss, to $5,000, a deviation of 5% from the notional amount used.

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Figure 11. False breakout stop loss optimization strategy on BitCoin (BTC)

Obviously, the solution without stop loss is better in terms of net profit. However, the assessment of system withdrawal is different. In fact, in all situations where a stop loss is identified, the drawdown is lower than when no stop loss is identified.

Among the best results is the range between $3,000 and $5,000. Usually in reversal strategies it is normal to find stop loss values ​​that could be described as “wide”. However, it may be wider than normal because when you enter a reversal, you are not sure of the exact point at which the trend reversal will occur.

So we choose $3,500 as a reasonable value for this market because it keeps the total profit almost the same, reduces the drawdown by 30%, and the average transaction is large enough for live trading.

Figure 12 shows the profit curve after adding the stop loss. As seen in the previous optimization, the stop loss reduces the drawdown and decreases the volatility of the profit curve.

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Figure 12. False stock breakout strategy on BitCoin (BTC) after adding Stop Loss

Trading System Conclusions Based on BitCoin (BTC) False Breakout

Bitcoin proves to be a constantly evolving market. In fact, this article has shown that a reversal strategy works well, even in a notoriously trend-following market.

This aspect means flexibility and ability to adapt to the different market phases that all traders will inevitably face. Therefore, having different types of strategies potentially used in this market makes the market itself increasingly attractive, even for automated trading.

See you next time and happy trading!


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