AO Indicator Based Trend Following Strategy

Pine ScriptTrend following Breakout Momentum RSI EMA SMA

Author: ChaoZhang
Complexity: Starter · 43 lines
Parameters: 4
Backtest bar: 1m · intraday
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Overview

This strategy uses the Awesome Oscillator (AO) indicator to determine the trend direction and moving averages to confirm the trend. It belongs to the trend following strategy. It goes long when the AO indicator crosses above the 0 level and the fast MA crosses above the slow MA, and goes short when the AO crosses below the 0 level and the fast MA crosses below the slow MA, taking advantage of the directionality of trends to profit.

Strategy Logic

This strategy mainly relies on the AO indicator to determine the short-term trend direction. The AO indicator is calculated based on the difference between the 5-period and 34-period simple moving averages of the mid-price. It belongs to the Momentum category of indicators. When the AO is positive, it means the short-term MA is above the long-term MA, which should be interpreted as a bullish sign. When the AO is negative, it means the short-term MA is below the long-term MA, which should be interpreted as a bearish sign.

Therefore, the AO indicator can effectively determine the direction of the trend. When the AO crosses above the 0 level, it signals that the market trend has turned bullish and we should go long. When the AO crosses below the 0 level, it signals that the market trend has turned bearish and we should go short.

In addition, this strategy also incorporates the 20-period and 200-period moving averages. The slope of these two MAs represents the direction of the medium to long-term trend. Judging only by the AO indicator for the short-term trend direction is not enough, confirmation from the mid-long term trend is also needed, hence the addition of the MA crossover rules.

When the fast MA crosses above the slow MA, the mid-long term trend turns bullish, we go long when the AO crosses above 0 to ride the uptrend. When the fast MA crosses below the slow MA, the mid-long term trend turns bearish, we go short when the AO crosses below 0 to ride the downtrend.

Advantages

Accurately determining short-term trend direction using the AO indicator
Adding MA filters to confirm mid-long term trend, effectively avoiding false breakouts
Fast profits, suitable for short-term trading

Risk Analysis

Risk of failed entry when going short. Price may continue going up for some time after AO crosses below 0 and MA signals sell before turning down.
Risk of failed entry when going long. Price may continue going down for some time after AO crosses above 0 and MA signals buy before turning up.
Risk of distorted AO signals at major technical levels.

Improvement Directions

Test different MA combinations to find better settings, e.g. 10- and 50-period MAs
Add other indicators like RSI for signal confirmation
Optimize stop loss percentage for better risk/reward ratio

Conclusion

This is a simple trend following strategy. Using the AO to determine short-term trend direction confirmed by mid-long term MAs is logically sound. The combination of AO and MAs sees widespread usage and is relatively mature. This strategy is also very reliable. Further optimization of parameters and other indicators can improve strategy performance.

Parameters

Name	Default	What it controls
v_input_bool_1	true	long
v_input_bool_2	true	short
v_input_float_1	10	profit
v_input_float_2	5	stop

Source Pine Script

/*backtest
start: 2023-12-12 00:00:00
end: 2023-12-14 20:00:00
period: 1m
basePeriod: 1m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

// https://www.youtube.com/watch?v=zr3AVwjCtDA

//@version=5
strategy(title="Bingx ESTRATEGIA de Trading en 1 minuto ", shorttitle="AO")
long = input.bool(true, "long")
short = input.bool(true, "short")
profit = (input.float(10, "profit") / 100) + 1
stop = (input.float(5, "stop") / 100) + 1
ao = ta.sma(hl2,5) - ta.sma(hl2,34)
diff = ao - ao[1]
plot(ao, color = diff <= 0 ? #F44336 : #009688, style=plot.style_columns)
changeToGreen = ta.crossover(diff, 0)
changeToRed = ta.crossunder(diff, 0)
alertcondition(changeToGreen, title = "AO color changed to green", message = "Awesome Oscillator's color has changed to green")
alertcondition(changeToRed, title = "AO color changed to red", message = "Awesome Oscillator's color has changed to red")

ema20 = ta.ema(close, 20)
ema200 = ta.ema(close, 200)
rsi = ta.rsi(close, 7)
plot(rsi)
plot(0, color=color.white)
var float pentry = 0.0
var float lentry = 0.0
var bool oab = false
// oab := ta.crossover(ao, 0) ? true : ta.crossover(0, ao) ? false : oab[1]

if long and close > open and ta.crossover(close, ema20) and ema20 > ema200 and ao > 0 and rsi > 50
    strategy.entry("long", strategy.long)
    pentry := close
strategy.exit("exit long", "long", limit=pentry * profit, stop=pentry / stop)

if short and close < open and ta.crossunder(close, ema20) and ema20 < ema200 and ao < 0 and rsi < 50
    strategy.entry("short", strategy.short)
    lentry := close
strategy.exit("exit short", "short", limit=lentry / profit, stop=lentry * stop)

Published by ChaoZhang on the FMZ strategy square · last modified 2023-12-20. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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