How does the ETH 26 Day Exponential Moving Average Crossover Set work?
The ETH 26 Day Exponential Moving Average Crossover Set implements a crossover strategy on the ETH 26 day exponential moving average indicator. Learn more about how EMA, SMA, and crossovers work here.
On a high level, ETH26EMACO automatically triggers rebalances between ETH and USDC when the price of ETH crosses above or below the 26 Day Exponential Moving Average (26 EMA). ETH26EMACO typically rebalances as frequently as the ETH20SMACO, but reacts to trends more quickly.
How is the ETH26EMACO different from ETH20SMACO?
On the surface, ETH26EMACO and the ETH 20 Day Moving Average Crossover Set both generate a similar number of crossover signals and rebalances.
However, the ETH26EMACO rebalances based on a weighted average which detects trend reversals earlier than ETH20SMACO. In strong trending markets (2017 bull market, 2018 bear market) ETH26EMACO typically generates more reliable signals than that of ETH20SMACO. In horizontal markets, ETH26EMACO will typically generate more false positive signals. Read more on historical performance below.
Both ETH20SMACO and ETH26EMACO can be used in combination to diversify the risk of false signals in trend trading.
How does the Set perform?
Disclaimer: The content below is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. The content below is provided for educational purposes only, and not indicative of future performance. None of the following should be interpreted as investment advice. The tools used below follow a predefined set of parameters and aren’t actively managed by Set Labs Inc.
View a model of the backtest here. This chart below compares the hypothetical performance of holding the ETH26EMACO Set against holding ETH over the last 3 years, assuming a slippage rate of 1% during each rebalance. The model shows ETH26EMACO would have outperformed over the given historical time period and performed roughly the same in the long bull market of late 2017 - early 2018.
Utilizing the same historical period, ETH26EMACO would have also outperformed the ETH20SMACO Set. Link to ETH20SMACO details here.
The chart below illustrates the ETH that would have been accumulated using the \
ETH26EMACO Set following the same assumptions above.
It’s important to keep in mind the the charts above are based on a number of assumptions and are only meant for illustrative purposes. As always, past performance is not indicative of future performance.
These charts use generated ETH hourly data sourced from Gemini. In production, the ETH26EMACO Set rebalances based on MakerDAO’s ETH price feed, which may output different results. If you’d like to play around with the data yourself (and tweak the parameters), feel free to fork the spreadsheet here.
In what markets do the ETH26EMACO typically outperform and underperform?ETH26EMACO typically outperforms in directional markets (bear or bull), and typically underperforms in choppy markets as EMAs may pick up more false signals resulting in more rebalances.
Why use the 26 Day Exponential Moving Average?
The 26 Day Exponential Moving Average (26 EMA) is one of the most popular trading indicators to determine when to enter and exit positions in the short term.
The 26 EMA is a default indicator on Coinbase Pro.
In contrast to simple moving averages (SMA), exponential moving averages (EMA) put more weight on recent price history. As a result, EMAs are responsive to sudden price fluctuations and reduces the price lag which are a disadvantage in many trend following strategies including SMAs. Learn more on the difference between SMA and EMA here.
The 26 EMA (along with the 12 EMA) is typically used to construct Moving Average Convergence Divergence or MACD - another extremely popular indicator.
How is the 26 EMA calculated on TokenSets?
The 26 EMA indicator is a weighted average of the on-chain MakerDAO ETH price for the past 26 days at 7:00 pm UTC each day. Link to technical documentation of the EMA oracle here.
What are the additional criteria needed to trigger a rebalance?
The rebalance criteria includes a minimum interval of 96 hours between rebalances and a confirmation period after the initial price-indicator crossover to reduce false positive signals. If the signal at the time of the initial crossover (e.g. price > moving average) matches the signal after 6 hours, then the Set will kickoff a rebalance. If the signal fails to match the signal after 12 hours, then the rebalance expires and another price-indicator crossover must occur.
How long does the rebalance take to complete?
Rebalances for the ETH26EMACO take approximately 2 hours to complete. Price drift is on average <1% over the course of 2 hours based on historical MakerDAO ETH price data. Learn more about Set rebalances here.
View the ETH 26 Day EMA Crossover Set.