How does the ETH 12 Day Exponential Moving Average Crossover Set work?
The ETH 12 Day Exponential Moving Average Crossover Set implements a crossover strategy on the ETH 12 day exponential moving average (12 EMA) indicator. Learn more about how EMA, SMA, and crossovers work here.
On a high level, ETH12EMACO automatically triggers rebalances between ETH and USDC when the price of ETH crosses above or below the 12 Day Exponential Moving Average (12 EMA). ETH12EMACO typically reacts to trend reversals more frequently than SMA Sets.
See the chart below:
Why use the 12 Day Exponential Moving Average?
The 12 Day Exponential Moving Average (12 EMA) is one of the most popular trading indicators used by short term traders to determine when to enter and exit positions.
The 12 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 12 EMA is typically used to construct Moving Average Convergence Divergence or MACD - another extremely popular indicator.
What is the difference between ETH12EMACO and ETH20SMACO?
In contrast to the ETH 20 Day Moving Average Crossover Set, the ETH12EMACO rebalances based on an exponential indicator that is more responsive to sudden price fluctuations. This means rebalances are more frequent with the goal of catching short term price spikes and dips.
ETH12EMACO can be used in combination with any other Trend Trading Sets to diversify the risk of false signals for short term 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 ETH12EMACO Set against holding ETH over the last 1, 2, and 3 years, assuming a slippage rate of 1% during each rebalance.
Over the last year, the model shows ETH12EMACO would have outperformed ETH consistently. Compared to ETH20SMACO and ETH50SMACO, the ETH12EMACO would have outperformed and accumulated more ETH over the past year based on historical data.
The chart below illustrates the ETH that would have been accumulated using the ETH12EMACO Set following the same assumptions above.
Over the last 2 years, the model shows ETH12EMACO would have also outperformed ETH but underperformed specifically in strong bull markets.
Over the last 3 years, the model shows ETH12EMACO would have performed roughly the same as ETH, as it underperformed in most of the bull market in 2017.
The Set does not outperform ETH in all market conditions - instead it can be used to accumulate ETH in short term flat or downtrending markets.
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 ETH12EMACO 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 ETH12EMACO typically outperform and underperform?ETH12EMACO typically outperforms in short term flat or downtrending markets, and typically underperforms in choppy markets.
How is the 12 EMA calculated on TokenSets?
The 12 EMA indicator is a weighted average of the on-chain MakerDAO ETH price for the past 12 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 ETH12EMACO 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 and our TWAP Rebalancing feature here.