Absolute Price Oscillator Trend Following Strategy

This strategy uses the Absolute Price Oscillator (APO) indicator to generate trading signals and follow trends. The APO calculates the difference between two EMAs and trades crossovers above/below zero.

Pine ScriptTrend following Mean reversion Momentum EMA

Author: ChaoZhang
Complexity: Starter · 51 lines
Parameters: 5
Backtest bar: 4h · intraday
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Overview

Strategy Logic

APO consists of a faster and slower EMA, taking the difference between them.
When APO crosses above the buy zone (default 3), go long. When it crosses below the sell zone (default -3), go short.
Option to reverse signals - cross above sells, cross below buys.
Curve shows price momentum, can find reversals on divergence.

This is a trend following strategy, using APO to determine trend direction for sustained long/short signals. Optimized parameters can track medium-term trends.

Advantages

Simple implementation using basic moving average combination.
APO gauges price momentum and direction.
Default parameters generate medium-term sustained signals, avoiding over-trading.
Can detect trend reversals based on price/indicator divergence.

Risks

Prone to false signals and whipsaws in ranging markets.
Lagging signals may miss quick reversals.
No stop loss or position sizing, incomplete risk management.

Mitigations:

Optimize parameters and test different combinations per instrument.
Add filters to avoid trading in choppy conditions.
Implement stop loss, e.g. trailing stop.

Enhancement Opportunities

Parameter optimization for each instrument to find ideal pairs.
Additional filters on price action or volume to reduce false signals.
Dynamic position sizing based on volatility or account %.
Optimized take profit such as trailing stop to follow trends.
ML to assess probability of successful divergence signals.

Conclusion

This EMA crossover system using APO provides a solid foundation for trend following. With optimizations in parameters, risk management and filters, it can become an effective quantitative strategy. The core concept is simple and robust for further development.

Parameters

Name	Default	What it controls
v_input_1	10	LengthShortEMA
v_input_2	20	LengthLongEMA
v_input_3	3	BuyZone
v_input_4	-3	SellZone
v_input_5	false	Trade reverse

Source Pine Script

/*backtest
start: 2022-09-14 00:00:00
end: 2023-09-20 00:00:00
period: 4h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=2
////////////////////////////////////////////////////////////
//  Copyright by HPotter v1.0 20/09/2018
// The Absolute Price Oscillator displays the difference between two exponential 
// moving averages of a security's price and is expressed as an absolute value.
// How this indicator works
//    APO crossing above zero is considered bullish, while crossing below zero is bearish.
//    A positive indicator value indicates an upward movement, while negative readings 
//      signal a downward trend.
//    Divergences form when a new high or low in price is not confirmed by the Absolute Price 
//      Oscillator (APO). A bullish divergence forms when price make a lower low, but the APO 
//      forms a higher low. This indicates less downward momentum that could foreshadow a bullish 
//      reversal. A bearish divergence forms when price makes a higher high, but the APO forms a 
//      lower high. This shows less upward momentum that could foreshadow a bearish reversal.
//
// You can change long to short in the Input Settings
// WARNING:
// - For purpose educate only
// - This script to change bars colors.
////////////////////////////////////////////////////////////
strategy(title="Absolute Price Oscillator (APO) Backtest 2.0", shorttitle="APO")
LengthShortEMA = input(10, minval=1)
LengthLongEMA = input(20, minval=1)
BuyZone = input(3, step = 0.01)
SellZone = input(-3, step = 0.01)
reverse = input(false, title="Trade reverse")
hline(BuyZone, color=green, linestyle=line)
hline(SellZone, color=red, linestyle=line)
hline(0, color=gray, linestyle=line)
xPrice = close
xShortEMA = ema(xPrice, LengthShortEMA)
xLongEMA = ema(xPrice, LengthLongEMA)
xAPO = xShortEMA - xLongEMA
pos = iff(xAPO > BuyZone, 1,
       iff(xAPO < SellZone, -1, nz(pos[1], 0))) 
possig = iff(reverse and pos == 1, -1,
          iff(reverse and pos == -1, 1, pos))	   
if (possig == 1) 
    strategy.entry("Long", strategy.long)
if (possig == -1)
    strategy.entry("Short", strategy.short)	   	    
barcolor(possig == -1 ? red: possig == 1 ? green : blue )  
plot(xAPO, color=blue, title="APO")

Published by ChaoZhang on the FMZ strategy square · last modified 2023-09-21. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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