When trading indicators appear flawless, it is precisely when we should be most vigilant. This article will delve into the hidden issues behind the Glassnode top and bottom detector from the perspective of strategy developers, teaching you how to truly examine the logic and credibility of a model. (Background: The reason I never take breakout trades: A trap for liquidity hunters) (Background context: A must-read for spot traders: An alternative landlord exit strategy) TLDR This article will introduce a top and bottom detector provided by the Glassnode website, explaining the obvious yet little-known flaws from the perspective of trading strategy development, and describing the proper way to assess trading strategies, indicators, and models. Introduction to the BTC top and bottom detector on the Glassnode website In the on-chain data website Glassnode, there exists a BTC periodic top and bottom signal detector called 'Cycle Change Detection Via Drilling Methods.' As shown in the image above, the performance of this top and bottom detector seems quite good at first glance over the last three cycles, but there are actually some fatal problems. We will discuss the issues later; first, let's introduce the design principles of this model. The model primarily uses four concepts: Realized Price: It can be seen as the average holding cost of BTC in the entire market, with detailed content previously introduced (On-chain Data Academy (1): Do you know what the average cost of BTC in the entire market is?). Mayer Multiple: The definition of Mayer Multiple is 'the ratio of Bitcoin price to the 200-day simple moving average,' in other words, 'Bitcoin price / SMA(200),' which measures 'how many times the current price is compared to MA(200).' PSIP (Percent Supply In Profit): The definition of PSIP is 'the proportion of profitable chips among circulating BTC,' with detailed content previously written (On-chain Data Academy (5): How many people are actually making profits? Understanding the objective sentiment indicator PSIP!). Correlation between price and PSIP: Theoretically, the price and PSIP trends should exhibit a high positive correlation, as the higher the price rises, the higher the proportion of profitable chips should be. Therefore, the original author believes that when the correlation between price and PSIP significantly decreases, it indicates extreme market sentiment. After understanding the above four concepts, we will discuss how this model detects tops and bottoms. Bottom Signal: The bottom signal appears when the following two conditions are met: Price is below Realized Price; Price and PSIP's 7-day correlation is below 0.75. Top Signal: The top signal appears when the following two conditions are met: Mayer Multiple > 2.4; Price and PSIP's 7-day correlation is below 0.75. Discussing significant flaws in the model from the perspective of trading strategy development: Imagine today someone introduces this top and bottom detector to you using the above text. Aside from its historical accuracy being high, the logic seems very meticulous, so you decide to use this model to exit at the top in this cycle... Most retail investors are persuaded this way, making it hard to notice the flaws at first glance. Next, let's discuss where the model's problems actually lie. Flaw 1: The parameters have a 'carving a boat to seek a sword' problem. When I first saw this model, I asked myself a question: 'Why is a correlation below 0.75 a warning?' Clearly, this parameter setting lacks a clear logic. In such a short historical cycle of BTC (with severely insufficient sample size), the flaw of 'carving a boat to seek a sword' immediately surfaces. Flaw 2: The Mayer Multiple itself is a complete case of 'carving a boat to seek a sword.' If the correlation between price and PSIP has some logic (deduction), then the Mayer Multiple is a prime example of 'carving a boat to seek a sword.' Simply detecting tops and bottoms based on the ratio of price to SMA(200) may seem good historically, but the issue is that market conditions change yearly; why must the Mayer Multiple exceed 2.4 at the peak of this bull market? Flaw 3: The filtering effect of correlation is too weak; the strength of detecting tops and bottoms is insufficient. When I first saw the idea of 'the correlation between PSIP and price,' I was quite interested, so I quickly wrote a simple 'signal based solely on correlation' using Glassnode to see how the filtering effect of PSIP and price correlation works. As shown in the image above, I set 'correlation between price and PSIP < 0.75' as a condition, and once met, it displays a blue signal. Readers should notice, right? It is full of blue... Therefore, correlation itself is really hard to serve as a strong filter for detecting tops and bottoms, or we can say that the parameter of 0.75 itself is problematic. If I had to provide an explanation based on the graph, I could at most conclude that 'signals appear more frequently when close to the top,' but the conclusion itself remains quite rigid. Following this thought, I simply removed the 'correlation filter' from the model, leaving only the Realized Price for detecting bottoms and the Mayer Multiple for detecting tops as signals, resulting in the following simplified model signal chart: Did you notice? The effects are almost unchanged. Thus, this chart directly confirms my earlier inference: the filtering effect of correlation is practically negligible. Key points summary and conclusion: The main purpose of this article is to take readers to personally experience how to 'objectively assess and examine' a trading strategy, model, or indicator from the perspective of professional trading strategy development. I often emphasize and remind readers: 'This bull market will be a bloody test for over 90% of the exit indicators in the market.' More exit indicators are not necessarily better; quantity is not the key; the focus is whether the indicators behind have a scientifically logical discourse. In the era of the internet, with an explosion of information, countless seemingly impressive theories can be seen everywhere. In this environment, I believe the most important thing is to possess the ability of 'critical thinking.' Otherwise, readers can ask themselves: If today I only wrote the introduction of the model in the first paragraph, how many people would choose to believe it directly? After all, it seems quite impressive, doesn't it? Additionally, I would like to mention that I personally believe there are more efficient indicators than Realized Price when it comes to choosing a bottom, as Realized Price considers the chips of the entire market, including those long-term dormant or lost BTC, which I feel lacks flexibility. Below, I will summarize the key points of this article into an image for easy review: That concludes today's sharing; I hope it helps all readers, and thank you for your reading.

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