Dual Oscillation Tracking Reversal Trading Strategy

This is a dual oscillation tracking reversal trading strategy that combines the stochastic indicator reversal strategy and the Chaikin volatility indicator to obtain more reliable trading signals. The strategy aims…

Pine ScriptMean reversion Trend following Volatility EMA SMA Stochastic

Author: ChaoZhang
Complexity: Intermediate · 73 lines
Parameters: 8
Backtest bar: 2h · intraday
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Overview

Strategy Logic

The strategy consists of two parts:

Stochastic Indicator Reversal Strategy

This part uses the fast line and slow line of the stochastic indicator to generate trading signals. It goes long when the closing price is lower than the previous closing price for two consecutive days and the fast line is above the slow line. It goes short when the closing price is higher than the previous closing price for two consecutive days and the fast line is below the slow line.

Chaikin Volatility Indicator

This indicator calculates the change in the spread between the highest and lowest prices over a period of time. When the spread widens, it signals increasing volatility and a short position can be taken. When the spread narrows, it signals decreasing volatility and a long position can be taken.

The final trading signal is a combination of the signals from the two parts. When the stochastic indicator signal and volatility indicator signal agree, that signal is taken. Otherwise, no trade is taken if the two signals disagree.

Advantage Analysis

The advantages of this strategy include:

Combining two different types of indicators improves signal accuracy.
The dual confirmation mechanism reduces false signals and controls risk.
Focusing on reversals as the main trading direction allows profits at trend turning points.
Flexible parameter settings make it adaptable to different products and timeframes.
Fine tuning of indicator parameters allows optimization.

Risk Analysis

The risks of this strategy include:

Reversal signals may be wrongly judged, leading to losses. Adjusting parameters can reduce misjudgement probability.
Shorting during sharply rising volatility has loss risks. Stop loss can control the risk.
The dual indicator combo may fail during extreme market swings. Consider pausing trading until indicators stabilize.
Monitoring two indicators increases workload. Automated trading can reduce workload.

Improvement Directions

Improvements for this strategy include:

Test more parameter combinations to find optimal parameters.
Add other confirming indicators like volume etc. to create multiple confirmation.
Add stop loss mechanisms like trailing stop, zone stop etc. to further control risk.
Optimize money management like fixed fractional, Kelly etc. to improve profit efficiency.
Test applicability across more products and timeframes with different parameter settings.

Conclusion

This strategy combines dual indicators for trading signals, with a focus on capturing reversals. It has advantages like high signal accuracy and good risk control, and has room for improvements. With optimizations to parameters, stop loss, money management etc., it can be enhanced into a robust medium-to-long term reversal trading strategy.

Parameters

Name	Default	What it controls
v_input_1	14	Length
v_input_2	true	KSmoothing
v_input_3	3	DLength
v_input_4	50	Level
v_input_5	10	LengthCV
v_input_6	12	ROCLength
v_input_7	false	Trigger
v_input_8	false	Trade reverse

Source Pine Script

/*backtest
start: 2023-09-10 00:00:00
end: 2023-10-10 00:00:00
period: 2h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
////////////////////////////////////////////////////////////
//  Copyright by HPotter v1.0 29/07/2019
// 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
// Chaikin's Volatility indicator compares the spread between a security's
// high and low prices. It quantifies volatility as a widening of the range
// between the high and the low price.
// You can use in the xPrice1 and xPrice2 any series: Open, High, Low, Close, HL2,
// HLC3, OHLC4 and ect...
//
// 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

ChaikinVolatility(Length, ROCLength, Trigger) =>
    pos = 0
    xPrice1 = high
    xPrice2 = low
    xPrice = xPrice1 - xPrice2
    xROC_EMA = roc(ema(xPrice, Length), ROCLength)
    pos := iff(xROC_EMA < Trigger, 1,
	         iff(xROC_EMA > Trigger, -1, nz(pos[1], 0))) 
    pos

strategy(title="Combo Backtest 123 Reversal & Chaikin Volatility", shorttitle="Combo", overlay = true)
Length = input(14, minval=1)
KSmoothing = input(1, minval=1)
DLength = input(3, minval=1)
Level = input(50, minval=1)
//-------------------------
LengthCV = input(10, minval=1)
ROCLength = input(12, minval=1)
Trigger = input(0, minval=0)
reverse = input(false, title="Trade reverse")
posReversal123 = Reversal123(Length, KSmoothing, DLength, Level)
posChaikinVolatility = ChaikinVolatility(LengthCV, ROCLength, Trigger)
pos = iff(posReversal123 == 1 and posChaikinVolatility == 1 , 1,
	   iff(posReversal123 == -1 and posChaikinVolatility == -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 2023-10-11. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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