TRADING: Forecasting Bitcoin for Tomorrow (Oct/22/2016)

profitgenerator (68)in #mathematics • 8 years ago (edited)

I am going to forecast tomorrow's Bitcoin price using GARCH in this article, I have explained in the previous articles how to forecast and debunked technical analysis tools. GARCH is my favorite tool, but it takes a long time to forecast with it, about 1 hour / forecast so I don't use it that frequently, but it's very useful.

You can read my previous 3 articles, if you don't understand what I am talking about:

I have also forgot to say, or I didn't emphasized, but I thought it was obvious, that GARCH only forecasts 1 datapoint in the future. It's not like ARIMA where you can guess a future trend, GARCH only works for 1 future datapoint, and then it needs to be updated once every new datapoint comes out.

This is what I did in the previous article, I have forecasted 1 datapoint, and then the 2nd was updated after the new datapoint came out. There was no future information leakage, I have triple checked it, so it was done properly, however just so you know that it was updated after every single datapoint, as I have used historical data obviously.

If the data is not updated, the forecast error adds up exponentially, and creates an avalanche effect, and the forecast totally derails. So don't think for a moment that I can forecast 10 years of data with 98% accuracy it doesn't work that way. But I do can forecast 1 future datapoint with 98% accuracy.

So you can see the difference, if the forecast is not updated after new data comes out, the forecast totally derails. There is obviously no way to forecast accurately into the far future, it is just physically impossible. But still, forecasting 1 datapoint, is enough, and it is very very useful.

Forecasting Bitcoin

Now let's forecast Bitcoin, BTC/USD, for tomorrow that is Oct/22/2016 00:00 , I guess UTC timezone, I am using Blockchain.info's data, so you should ask them. The price might not be entirely correct since not all exchanges have the same price, so compare Blockchain.info's data to your exchange's data. Today's price is not yet published there so it will be a 1.5 or technically a 2 day forecast from the data I have. It is daily data obviously.

I am not going to reveal the exact model that I am using, nor the parameters nor coefficients that I am using, because I am trading this too (but not as a daytrader). But just so you know we will use GARCH. The model I have selected has a Mean Absolute Error of 0.0322, so it's bigger than the EURUSD data forecasted in the previous article. It might not be a that much accurate forecast, but this is the best model I have found still.

The residuals are normally distributed, so our model fits very well on the BTC_USD data: Chi-square(2) = 3238.837 with p-value 0.00000

The GARCH model looks like this, and even though the general error is higher than my EURUSD forecast, there are less spikes, so overall we should miss by smaller distances.

The forecasted GARCH on actual data and the next 2 datapoints looks like this:

It is zoomed in so you should see on average how accurately we can forecast price change. Finally, we put it all together and construct the future price points, this is what our forecast tells us:

BTC_USD on Oct 22 should be 636.34390$

Disclaimer: The information provided on this page might be incorrect. I am not responsible if you lose money using the information on this page! This is not an investment advice, just my opinion and analysis for educational purposes.

Data Source: Blockchain.info