Moving averages: the foundation of trend following

Moving averages: the foundation of trend following

A moving average is the average price over a fixed period, shifting forward one day at a time: the oldest price drops out of the calculation and the newest one joins. The result is a line that smooths the jagged day-to-day price action and reveals the underlying direction. For trend-following strategies this instrument is the foundation: simple enough to understand completely, powerful enough to build a strategy on.

What the average shows

Daily prices jump around on news, sentiment and chance. The moving average filters that noise: by condensing a series of days into a single value per day, the outliers disappear and the direction remains. When the line slopes upward, the market has on balance risen over the chosen period; when it slopes downward, the market has fallen. The average says nothing more than that. Precisely that restraint makes it so useful: the instrument claims nothing it cannot deliver.

Price above or below the average

The classic trend signal comes from the relationship between the price and its average. A price above the average sits higher than its own recent past: an indication of a rising trend. A price below the average points the other way. A systematic strategy then attaches rules to this, for instance by being invested only while the price stays above its average. The signal remains a measurement, not a prophecy: it describes what is happening, not what will happen next.

Why simplicity beats prediction

The temptation to want more is real: models that predict tops and bottoms, indicators that must confirm one another, rules with dozens of conditions. That complexity carries a well-known risk called overfitting: a model that describes the past perfectly and, for that very reason, handles the future poorly. The more dials a system has, the greater the chance it has been tuned to coincidence. A moving average, by contrast, makes hardly any assumptions; it merely summarises what the price has actually done. That simplicity keeps the rule testable and durable, even when the character of the market changes.

Period and execution: where the craft lies

Simple is not the same as easy, however. The choice of period defines the character of the signal: a short average responds quickly but produces many false signals; a long average is calm but late. Averages over, say, 50 or 200 days are widely used in the market. Those are common conventions among analysts, emphatically not a reflection of the settings Callisto Capital uses. Execution matters at least as much: how a signal is converted into trades, how trading costs are handled and how signals across multiple coins are combined into one whole. That is exactly where the craft lies; the precise periods and parameters of our strategy therefore belong to the fund’s intellectual property.

Further reading

Why an investor follows trends instead of predicting prices is the subject of our article on trend-following investing. The broader framework, including emotion-free investing, risk management and diversification across Bitcoin, Ethereum and altcoins, is set out in our overview article on the systematic crypto strategy.

Which signals stay internal

Within Callisto Capital’s own strategy, trend following likewise runs on fixed, predefined signals. Which indicators the model uses, and at which settings, stays internal by design. That is the part the fund does not publish.

Callisto Capital is a Dutch fund for joint account; its manager is registered with the AFM under the AIFMD-light regime and is not subject to ongoing supervision. Participation is open from an investment of 100,000 euro. This article is for information only and does not constitute investment advice.