Double Fractal Breakout Strategy

The double fractal breakout strategy is a quantitative trading strategy based on technical pattern recognition. It identifies potential trend reversals by detecting double bottom and double top fractal formations…

Pine ScriptBreakout Mean reversion Trend following

Author: ChaoZhang
Complexity: Starter · 46 lines
Parameters: 0
Backtest bar: 1h · intraday
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Overview

Strategy Logic

The core idea behind this strategy lies in fractal theory. The emergence of M-shaped or W-shaped short term turning points suggests a possible reversal of the prevailing trend. Specifically, bottom or top fractals form when 5 consecutive bars create particular high/low combinations of relative greater/lower highs/lows. For example, a top fractal forms when the highest prices of the former 2 bars are above those of the latter 3 bars.

The strategy generates long and short signals when prices break below bottom fractals and above top fractals respectively, as such breakouts indicate a higher likelihood of trend reversal.

Advantages

The main advantage of this strategy is its ability to detect potential trend reversal points, which can be very useful for trend-following trading systems. Additionally, the double fractal pattern provides more reliable trading signals compared to strategies relying solely on single bar patterns.

Risks

The major risk is that fractal detection does not guarantee price reversals with full certainty. Sometimes prices may just be making short-term corrections without real trend changes. Incorrect signals can lead to unnecessary losses in such cases. To mitigate this risk, other indicators like trading volumes can be used to verify the validity of reversal signals.

Enhancement

Possible ways to enhance this strategy include:

Adding filters like volume to avoid false reversals.
Tuning parameters to detect larger-degree double fractals and capture big trend turns.
Incorporating moving stop loss to reduce losses from bad trades.

Conclusion

The double fractal breakout strategy identifies potential price reversals by detecting specific technical patterns. As a technical indicator-driven approach, it can effectively track short and medium-term trends in the market and provide respectable risk-reward outcomes. It is a reliable and practical trading system overall.

Source Pine Script

/*backtest
start: 2023-12-01 00:00:00
end: 2023-12-31 23:59:59
period: 1h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
// This source code is subject to the terms of the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/
// © ceyhun

strategy("Fractal Breakout Strategy", overlay=true)

FUp = high[4] < high[2] and high[3] < high[2] and high[1] < high[2] and high < high[2] or 
   high[5] < high[2] and high[4] < high[2] and high[3] <= high[2] and 
   high[1] < high[2] and high < high[2] or 
   high[6] < high[2] and high[5] < high[2] and high[4] <= high[2] and 
   high[3] <= high[2] and high[1] < high[2] and high < high[2] or 
   high[7] < high[2] and high[6] < high[2] and high[5] <= high[2] and 
   high[4] <= high[2] and high[3] <= high[2] and high[1] < high[2] and 
   high < high[2] or 
   high[8] < high[2] and high[7] < high[2] and high[6] <= high[2] and 
   high[5] <= high[2] and high[4] <= high[2] and high[3] <= high[2] and 
   high[1] < high[2] and high < high[2]
FractalUp = valuewhen(FUp, high[2], 1)
plot(FractalUp, color=#0000FF,title="FractalUp")

FDown = low[4] > low[2] and low[3] > low[2] and low[1] > low[2] and low > low[2] or 
   low[5] > low[2] and low[4] > low[2] and low[3] >= low[2] and low[1] > low[2] and 
   low > low[2] or 
   low[6] > low[2] and low[5] > low[2] and low[4] >= low[2] and low[3] >= low[2] and 
   low[1] > low[2] and low > low[2] or 
   low[7] > low[2] and low[6] > low[2] and low[5] >= low[2] and low[4] >= low[2] and 
   low[3] >= low[2] and low[1] > low[2] and low > low[2] or 
   low[8] > low[2] and low[7] > low[2] and low[6] >= low[2] and low[5] >= low[2] and 
   low[4] >= low[2] and low[3] >= low[2] and low[1] > low[2] and low > low[2]
FractalDown = valuewhen(FDown, low[2], 1)
plot(FractalDown, color=#FF0000,title="FractalDown")

if crossover(close, FractalUp)
    strategy.entry("Long", strategy.long, comment="Long")

if crossunder(close, FractalDown)
    strategy.entry("Short", strategy.short, comment="Short")

Published by ChaoZhang on the FMZ strategy square · last modified 2024-01-30. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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