HomeCryptoDevelopment of a simple but effective strategy on the crypto Solana (SOL)

Development of a simple but effective strategy on the crypto Solana (SOL)

In this article we will develop a strategy with a very simple logic, but that can be applied to different cryptos with truly interesting results. In this specific case, it will be applied to SOL, the native token of the Solana blockchain, which has recently attracted a lot of attention both for the significant price rally of SOL, and for its role as an innovative platform that aims for mass adoption, thanks to its high transaction speed and scalability.

Logic of the trend following breakout strategy applied to the crypto Solana (SOL)

The strategy in question is a simple trend following breakout that waits to enter long (or short) at the break of a certain price level, with the idea that such movement can continue in the direction taken. The session considered goes from 00:00 GMT to 23:59 GMT. These are conventional times chosen to coincide the session with the solar day, since cryptocurrencies are quoted 24 hours a day.

In this example, the price level to break in order to enter long will be the highest recorded in the same session, while at the break of the minimum, one will enter short. In order for the day’s high and low to form and be significant values, one must wait a certain amount of time after the start of the session: assuming waiting for the first hour of trading, one will start trading at 1:00 GMT and conclude it at 23:00 GMT.

Assuming to operate with a fixed size of $10,000 per trade, the trade will be closed when reaching a profit target of $2,000 or a stop loss of $1,000. 

By applying this strategy to the Solana spot market (SOL) against USDT (dollar-anchored stablecoin), from January 2017 to February 2024, not very encouraging results are obtained, with an equity line that ultimately gains, but seems to go nowhere.

trading strategy crypto solana sol
Figure 1 – Equity line of the raw strategy applied to the Solana crypto

Currently, the strategy only allows the market one hour to create reference highs and lows. It is therefore possible that by defining a different operating window, a better result can be obtained, thanks to more significant entry levels. By optimizing the start and end times of operations, it is found that operating from 6:00 pm until midnight, or at the end of the session, performance improves significantly.

In the following figures it can be seen how, using a fixed size of $10,000 per trade, the total profit of the system exceeds $42,000 in 480 operations, with an average trade of $88. These results still denote a rough strategy, with an average trade not particularly exciting when compared to the size used (88/10,000=0.88%).

trading strategy crypto solana sol
Figure 2 – Equity line of the strategy on Solana with operating window 18:00 – 00:00.
trading strategy crypto solana sol
Figure 3 – Total Trade Analysis of the strategy on Solana with operating window 18:00 – 00:00.

Refining the strategy on Solana: Stop Loss and price patterns

The current strategy involves using a stop loss at $1,000, which is 10% of the position value. In Figure 4, it can be seen that by varying the stop loss from 1% to 30% (last column on the right) of the position’s value, significantly interesting results are obtained. The average trade, in particular, increases to $127 using a stop loss of $2,100. This value also appears to be quite stable, considering the metrics between $2,000 and $2,400. 

trading strategy crypto solana sol
Figure 4 – Optimization of stop loss strategy on Solana.

Looking at the equity line of only long or short trades, it is noticeable how the short trades lower the system metrics. Considering that opening short positions on the spot market has a cost (in fact, cryptocurrency is borrowed), one could think of operating only long, with a simple modification of the code. But in this case, we will try to filter out short entries by only operating when a certain price pattern has occurred, and not operating when another one may occur.

To try to further improve the metrics, you could use some price patterns that can identify the best conditions in which to carry out operations, filtering out those with a lower probability of success.

In this regard, we will use a proprietary list that includes many different price combinations that will help us understand in which situations the crypto Solana (SOL) seems to better respond to breakout logic even on the short side. 

trading strategy crypto solana sol
Figure 5 – Optimization of price patterns for the strategy on Solana.

The combination of patterns “PtnSY=3” and “PtnSN=17” could be a good compromise between the main reference parameters (net profit, average trade, max intraday drawdown). With the pattern PtnSY=3, in fact, short entry will only be allowed if the “body” of the 5-day candle (open of 5 days ago minus yesterday’s close) was less than 50% of the total range in the same period (maximum high minus minimum low). This condition, in which the “body” has not exceeded 50% of the total range, effectively identifies days of little market conviction, which often precede a trend restart in case of breakout. With PtnSN=17, on the other hand, short entry will be prevented simply if yesterday’s candle was bullish (close > open).

Looking at the results, it is noticeable how this combination of filters actually manages to increase the average trade ($322) and the net profit ($77,309). The drawdown also decreases and stands at -10,450$. A good improvement, also visible from the shape of the equity line which becomes more regular.

Figure 6 – Equity line of the strategy on Solana after the insertion of price patterns.
Figure 7 – Total Trade Analysis of the strategy on Solana after the insertion of price patterns.

Conclusions on the trend following breakout strategy on the Solana crypto

With the addition of patterns, good results have been achieved, although certainly still far from those that would have been achieved with the simple “buy & hold” of Solana (SOL) from 2017 to today. 

However, the fluctuations of “buy & hold” are not comparable to those experienced by the trading system, in addition to the fact that the trading system uses a fixed size, while in “buy & hold” it is as if the profits obtained are being reinvested. 

Figure 8 – Buy & Hold trend of the crypto Solana (SOL).

The trend following breakout strategy has proven to be quite interesting on Solana (SOL) and can be applied with the necessary adjustments and optimizations to many other cryptocurrencies. This market is still quite young and presents a high and often explosive level of volatility, which fits well with this breakout trading logic. As always, we leave it to the reader to experiment and develop this idea.

Until next time and happy trading!

Andrea Unger

Andrea Unger
Andrea Unger
Italian trader and author known for being the only four-time World Trading Champion (2008, 2009, 2010, and 2012), Andrea graduated with honors in Mechanical Engineering from the Politecnico di Milano, member of MENSA, independent trader since 2001.