Adaptation of the mechanistic approach to the analysis of the cryptocurrency market

Abstract

The cryptocurrency market is rapidly developing, leading to increased research and development of new investment and trading strategies. Technical analysis is one of the methods of analysis in asset markets. It is based on using patterns and repetitions that correspond to certain behavior of an asset in the past to predict the behavior of the asset in the future. Therefore, analyzing digital currencies based on historical data is an important method for predicting price changes. The article highlights the use of a mechanistic approach to generalized technical analysis in the cryptocurrency market, which is based on physical principles and takes into account not only the price, but also the volume of transactions as a time-dependent generalized "mass". Such an interaction can be represented as a classical force (Newtonian mechanics) acting on an object (asset, index). However, given the high volatility and manipulability of digital assets, it is necessary to adapt the mechanistic approach to the considered market conditions. The article presents a generalized momentum formula and a momentum indicator formula for describing asset price changes as a complex effect between price and volume. Also, moving averages can be used for a generalized momentum indicator, but they often do not keep up with the price movement in the cryptocurrency market. Therefore, solving this problem, the application of the exponential moving average instead of the usual moving average, which reacts to price changes faster, is considered. The effectiveness of the adapted mechanistic approach for use in the cryptocurrency market, reducing the number of unprofitable deals and increasing the average profit, has also been confirmed. Applying the approach to the analysis of the cryptocurrency market has shown promising results, given that the analysis technique has previously proven successful in the stock markets.