In part 1 we looked at how commando entry signals perform with various commando scores and TP/SL strategies and found that expected returns were good in a large range of situations. But, as anybody familiar with commando has probably noticed, there are periods when trades just aren't as profitable. In this article we'll look at the impact of market conditions on expected returns.
For us to filter commando entry signals by market conditions, we need a reliable measure of market health. The stats in part 1 made it clear that commando's score is a reliable measure of each coin's performance, so it seems reasonable that the average of all commando scores would tell us about the state of the alt market overall. But this number isn't currently available on each commando update. We need an actionable substitute. The chart below confirm that the well known relationship between bitcoin's performance and the altcoin market's translates to their commando scores.
Bitcoin's commando score tracks the commando average fairly well. It's not perfect, but it'll do as our measure of market conditions.
It's plain to see that when bitcoin is bearish, the altcoin market is too, suggesting that only taking commando entries when bitcoin's commando score is above a threshold should improve outcomes. On top of that, the data shows that if bitcoin is performing too well, altcoin trade outcomes also deteriorate. No surprise, capital rotates into bitcoin when it's showing strength and strong bitcoin rallies are often followed by pullbacks that impact altcoin performance. Combining these two observations and testing various thresholds, I found that commando entry signals occurring when bitcoin's command score is between 0.5 and 2.0 lead to much better outcomes.
How often does that occur? Of the 550 scores assigned to bitcoin since commando began operating, about 40% are between 0.5 and 2.0. Their distribution is shown below.
