Trading Solana using a fast Shepherd's momentum binary signal

Introduction

This blog is the fourth, and last, of a series of four where I explore using our proprietary Shepherd's momentum (SM) signal to trade cryptocurrencies.

The complete series list is:

• "Trading Bitcoin using a fast Shepherd's Momentum signal",
• "Trading Ethereum using a fast Shepherd's Momentum binary signal",
• "Trading Ripple (XRP) using a fast Shepherd's Momentum signal",
• and, finally this blog, "Trading Solana, using a fast Shepherd's momentum binary signal",

In this series of blogs I backtest trading Bitcoin, Ethereum, XRP and Solana. I use two different versions of the SM (continuous and binary both with with no short sell allowed) and I also start simulations either from a low price or a peak. The following table shows the backtest classification:

As always, I aim to make this blog both accessible to beginners and engaging for experienced investors.

This blog is not an invitation to trade. Also does not intend to provide trading advice. Trading involves risks, and readers are solely responsible for their trading decisions.

The next graph shows Solana's price and volume, on a semi-logarithmic scale, since November eleventh, 2020.

Shepherd's momentum on solana

The Shepherd's momentum is a twist on the traditional moving average crossover indicator. The Shepherd's momentum is defined between -1 and 1. A value of 1 means full long and a value of -1 full short. Values in between indicate partial investment in Solana and the rest in cash.

The following graph shows the Solana price together with the full Shepherd's momentum signal.

Binary Shepherd's momentum and buy and hold performance

I modify SM in two ways:

• First short positions will not not be allowed as I assume that most investors are not able to short sell cryptocurrencies. Consequently if the signal is less than zero, the position will be zero.
• Second, I cover the case where investors either want to be out of the market or fully invested. This means that the signal will only be zero or one. The signal will be 0 if SM less or equal to 0, and 1 if SM is greater than 0 and less or equal to 1.

In summary, the amount of Solana held (the position) is given by: position = signal x capital / price, where signal is either 0 or 1.

As it is usual in finance, in this blog series, I will compare Shepherd's momentum performance with a buy and hold (B&H) strategy. The buy-and-hold strategy acts as a benchmark to assess whether Shepherd's momentum provides additional value.

In this blog I test how the Shepherd's momentum performs when starting the backtest near a price high. Therefore I started the backtest at the beginning of November 2021.

The next graph shows, on a semi-logarithmic scale, the Shepherd's momentum and buy and hold portfolios value over time, starting with an initial capital of 1000 USD in November, first 2021.

The next graph shows the Shepherd's momentum and buy and hold strategy percent invested. While B&H is always 100% invested, SM is mostly only partially invested.

The next table shows the main statistics, calculated on logarithmic returns, for both SM and B&H strategies.

The Shepherd's momentum strategy, during the 4 year and 4 months backtest period, achieved a return of about 360%. This return is about 5 times better than B&H which lost about 30% in the same period. This result is achieved while SM is in the market only about 45% of the time.

The information ratios are close to 1.0 and -0.7, for SM and B&H respectively.

Shepherd's momentum has a better risk profile than buy and hold:

• SM's yearly standard deviation is about 0.63 of B&H's. Nevertheless, both yearly standard deviations are high at 65 and 103. Bear in mind that one standard deviation losses are a likely occurrence over time.
• Both Value at Risk (VaR) and Conditional VaR (CVaR) are better for the SM strategy. The CVaR (also called expected shortfall - ES) gives the expected loss in the worst 5% (this threshold was arbitrarily set by me) of cases.
• SM's maximum drawdown is about 0.68 of B&H's.

The kurtosis (for more on the kurtosis read the "A word on returns" blog) is lower for the B&H strategy. Distribution with positive kurtosis have more extreme values, which means that both this investment strategies are prone to both large positive and negative returns. Therefore strategies with lower kurtosis are, in general, preferable.

In the particular case of the SM strategy the high kurtosis is due to the fact that SM has many zero returns, consequence of being often out of the market. This makes the returns distribution very concentrated around the mean.

Finally note that Solana's price at the end of February 2025 is below the peak attained in the beginning of November 2021.

Final remarks

There are a few points to have in mind:

• The results presented here are a simulation (a backtest).
• Trading involves risks, and readers are solely responsible for their trading decisions.
• Losses, when investing in leveraged products like futures and options, may exceed the original investment's value.
• Past performance, even when actually realized, is not indicative of future results.
• Buy and hold is easy and low-cost. Active trading is complex and incurs costs (slippage and commissions).
• Trading costs were not considered. Trading costs can significantly impact performance, especially in a relatively fast-moving strategy like this version of the SM.