Dual Moving Average Reversal Breakout Strategy

Pine ScriptBreakout Mean reversion Trend following SMA Stochastic

Author: ChaoZhang
Complexity: Intermediate · 70 lines
Parameters: 10
Backtest bar: 3m · intraday
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Overview

The Dual Moving Average Reversal Breakout Strategy is a combination strategy that incorporates both the 123 Reversal Strategy and the Price & Moving Average Divergence Strategy. The key idea of this strategy is to generate trading signals only when the 123 Reversal signals align with the price & MA divergence signals.

Strategy Logic

The Dual Moving Average Reversal Breakout Strategy consists of two components:

123 Reversal Strategy

The 123 Reversal Strategy generates trading signals based on two consecutive days of close price reversal (i.e. higher close followed by lower close; or lower close followed by higher close), combined with the 9-day Stochastic Oscillator K-line being below/above a certain level (default 50). Buy signals are generated when K-line is below 50 and sell signals are generated when K-line is above 50.
Price & Moving Average Divergence Strategy

The Price & MA Divergence Strategy calculates the percentage difference between price and a moving average of certain period (default 14). It generates buy signals when the divergence is below a threshold (default 3%) and sell signals when the divergence is above a threshold (default 0.54%).

The Dual Moving Average Reversal Breakout Strategy only generates actual trading signals when the signals from both strategies above align in the same direction, i.e. both are buy or both are sell signals.

Advantage Analysis

The Dual Moving Average Reversal Breakout Strategy combines the strengths of reversal and trend-following strategies for synergy.

The 123 Reversal picks reversals signals to capitalize on turnarounds. The Price & MA Divergence tracks the longer term trend. Together they capture short-term reversals while riding the bigger trend to avoid being trapped.

Moreover, by requiring aligned signals from both strategies, the number of invalid trades can be reduced significantly, improving signal-to-noise ratio.

Risk Analysis

While harnessing the strengths of both strategies, the Dual Moving Average Reversal Breakout Strategy also inherits the risks associated with each one.

For the 123 Reversal component, two consecutive daily reversals do not guarantee a real trend reversal. They could well be false signals caused by short-term pullbacks. Also, poor parameter tuning of the Stochastic Oscillator may degrade signal quality.

For the Price & MA Divergence part, inappropriate moving average parameters can lead to lagging signals. Also, the divergence itself does not indicate trend direction, only generating mechanical signals.

In summary, the major risks of this strategy come from poor parameter tuning and faulty signal generation. Risks can be mitigated via parameter optimization, stop loss/take profit, manual intervention etc.

Enhancement Opportunities

The Dual Moving Average Reversal Breakout Strategy can be enhanced in the following aspects:

Optimize MA and oscillator parameters for better signals
Add other indicators for signal filtering
Incorporate stop loss and take profit
Add trend determination to avoid untimely trades
Manual intervention and adaptive parameter tuning

With a combination of different enhancement methods, strategy stability and profitability can be further improved.

Conclusion

The Dual Moving Average Reversal Breakout Strategy combines the strengths of reversal and trend-following strategies, generating trades only when both signal types align. It captures short-term reversal opportunities while riding bigger trends to avoid traps. The dual-signal mechanism also improves reliability. With abundant enhancement opportunities, it is a versatile and powerful quantified trading strategy.

Parameters

Name	Default	What it controls
v_input_1	true	---- 123 Reversal ----
v_input_2	14	Length
v_input_3	true	KSmoothing
v_input_4	3	DLength
v_input_5	50	Level
v_input_6	true	---- Difference between price and MA ----
v_input_7	14	LengthDBP
v_input_8	0.54	SellZone
v_input_9	0.03	BuyZone
v_input_10	false	Trade reverse

Source Pine Script

/*backtest
start: 2023-12-10 00:00:00
end: 2023-12-17 00:00:00
period: 3m
basePeriod: 1m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
////////////////////////////////////////////////////////////
//  Copyright by HPotter v1.0 13/04/2021
// This is combo strategies for get a cumulative signal. 
//
// First strategy
// This System was created from the Book "How I Tripled My Money In The 
// Futures Market" by Ulf Jensen, Page 183. This is reverse type of strategies.
// The strategy buys at market, if close price is higher than the previous close 
// during 2 days and the meaning of 9-days Stochastic Slow Oscillator is lower than 50. 
// The strategy sells at market, if close price is lower than the previous close price 
// during 2 days and the meaning of 9-days Stochastic Fast Oscillator is higher than 50.
//
// Second strategy
// Percent difference between price and MA
//
// WARNING:
// - For purpose educate only
// - This script to change bars colors.
////////////////////////////////////////////////////////////
Reversal123(Length, KSmoothing, DLength, Level) =>
    vFast = sma(stoch(close, high, low, Length), KSmoothing) 
    vSlow = sma(vFast, DLength)
    pos = 0.0
    pos := iff(close[2] < close[1] and close > close[1] and vFast < vSlow and vFast > Level, 1,
	         iff(close[2] > close[1] and close < close[1] and vFast > vSlow and vFast < Level, -1, nz(pos[1], 0))) 
	pos


DBP_MA(Length,SellZone,BuyZone) =>
    pos = 0.0
    xSMA = sma(close, Length)
    nRes = abs(close - xSMA) * 100 / close
    pos:= iff(nRes < BuyZone, 1,
           iff(nRes > SellZone, -1, nz(pos[1], 0))) 
    pos

strategy(title="Combo Backtest 123 Difference between price and MA", shorttitle="Combo", overlay = true)
line1 = input(true, "---- 123 Reversal ----")
Length = input(14, minval=1)
KSmoothing = input(1, minval=1)
DLength = input(3, minval=1)
Level = input(50, minval=1)
//-------------------------
line2 = input(true, "---- Difference between price and MA ----")
LengthDBP = input(14, minval=1)
SellZone = input(0.54, minval=0.01, step = 0.01)
BuyZone = input(0.03, minval=0.01, step = 0.01)
reverse = input(false, title="Trade reverse")
posReversal123 = Reversal123(Length, KSmoothing, DLength, Level)
posDBP_MA = DBP_MA(LengthDBP,SellZone,BuyZone)
pos = iff(posReversal123 == 1 and posDBP_MA == 1 , 1,
	   iff(posReversal123 == -1 and posDBP_MA == -1, -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)	 
if (possig == 0) 
    strategy.close_all()
barcolor(possig == -1 ? #b50404: possig == 1 ? #079605 : #0536b3 )

Published by ChaoZhang on the FMZ strategy square · last modified 2023-12-18. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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