LL-040: Catching Falling Knives - Trend Confirmation Required

ID: LL-040 Impact: Identified through automated analysis

Date: December 15, 2025 Severity: HIGH Category: Trading Strategy Status: RESOLVED

Problem

Our crypto trading strategy was buying during “extreme fear” periods without confirming the price trend, resulting in losses from catching falling knives.

What Happened

Strategy v3.0 bought when Fear & Greed Index < 25 (contrarian buy)
Did NOT check if price was in a downtrend
Result: Bought BTC/ETH while prices were falling
Loss: -$96 overall portfolio

Root Cause

Fear & Greed alone is not enough - It’s a sentiment indicator, not a timing indicator
Missing trend confirmation - Buying during fear without checking if trend has reversed
Catching falling knives - Buying into a downtrend hoping for reversal

Solution

v4.0 Fix (Partial)

Added 50-day Moving Average filter
Only buy when price > 50-day MA
Research: 5x better returns per Coinbase study

v4.1 Fix (Complete)

Added RSI > 50 confirmation
Only buy when:
1. Price > 50-day MA (trend up)
2. RSI > 50 (momentum bullish)
Skip reason differentiates MA vs RSI failures

Implementation

# v4.1 Strategy Logic
def calc_rsi(prices, period=14):
    delta = prices.diff()
    gain = delta.where(delta > 0, 0).rolling(window=period).mean()
    loss = (-delta.where(delta < 0, 0)).rolling(window=period).mean()
    rs = gain / loss
    return 100 - (100 / (1 + rs))

# Entry conditions
above_ma = price > ma50  # Trend filter
rsi_bullish = rsi > 50   # Momentum filter
valid_entry = above_ma AND rsi_bullish

Research Basis

Coinbase Research: Trend-aware DCA (only buy above 50-day MA) = 5x better returns
RSI Momentum: RSI > 50 confirms momentum is bullish, not just price
Fear & Greed: Use for SIZING only (1.5x in extreme fear), NOT for timing

Prevention Checklist

Never buy based on sentiment alone (Fear & Greed)
Always confirm trend (price > MA)
Always confirm momentum (RSI > 50)
Use sentiment for position sizing, not entry timing
Backtest any strategy change before deployment

Files Changed

.github/workflows/force-crypto-trade.yml - v4.1 with RSI
.github/workflows/weekend-crypto-trading.yml - v4.1 with RSI

PR #649: feat: Crypto Strategy v4.1 - RSI momentum confirmation

Verification Tests Needed

Unit Test: RSI calculation accuracy
Integration Test: Entry signal requires both MA + RSI
Backtest: v4.1 vs v3.0 performance comparison
CI Check: Workflow syntax validation before merge