Dynamic Trend Confirmed Inverted Fair Value Gap Quantitative Trading Strategy

Pine ScriptTrend following Breakout Mean reversion SMA ATR Volume

Author: ianzeng123
Complexity: Starter · 87 lines
Parameters: 0
Backtest bar: 2m · intraday
Tested on: SOL/USDT · spot

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Overview

This strategy is a quantitative trading system based on Inverted Fair Value Gap (IFVG), combining moving average trend confirmation and dynamic trailing stop mechanisms. The strategy identifies Fair Value Gaps (FVG) in price action and their inversions, executing trades when supported by the trend. This approach ensures trade direction aligns with overall market trends while capturing key reversal points.

Strategy Principles

The core logic includes several key steps:

FVG Detection: Analyzes the overlap between current and previous candle price ranges to identify fair value gaps.
IFVG Confirmation: Forms a reversal signal when price breaks beyond FVG's high or low.
Trend Confirmation: Uses crossover relationship between 50-period and 200-period Simple Moving Averages (SMA) to determine market trend.
Entry Conditions: Goes long when price is below IFVG low in uptrends; goes short when price is above IFVG high in downtrends.
Risk Management: Combines fixed stop-loss with ATR-based dynamic trailing stops.

Strategy Advantages

Multi-dimensional Confirmation: Combines price structure (IFVG) and trend indicators (SMA) for more reliable analysis.
Dynamic Risk Management: Adjusts trailing stops using ATR indicator, protecting profits while allowing adequate price movement.
Risk-Reward Optimization: Implements 3R profit targets, pursuing higher returns with reasonable risk control.
Trend Filtering: Confirms trends through moving average crossovers, avoiding excessive trading in ranging markets.

Strategy Risks

Slippage Risk: Actual execution prices may deviate from ideal prices during high volatility.
Trend Lag: Moving averages as lagging indicators may cause slightly delayed entries.
False Breakout Risk: Price may quickly retrace after breakouts, triggering stops.
Parameter Sensitivity: Strategy performance is sensitive to SMA periods and ATR multiplier settings.

Strategy Optimization Directions

Indicator Enhancement: Consider adding volume confirmation signals to improve breakout reliability.
Parameter Adaptation: Introduce volatility metrics to dynamically adjust SMA periods and ATR multipliers.
Entry Timing Optimization: Add price pullback confirmation mechanism to avoid chasing highs or lows.
Position Sizing: Dynamically adjust position sizes based on market volatility and trend strength.
Profit-Taking Optimization: Use more relaxed trailing stop parameters in strong trends.

Summary

The strategy builds a complete trading system by combining IFVG price structure, trend confirmation, and dynamic risk management. While maintaining simplicity, it thoroughly considers key elements like market trends, risk control, and profit management. Through suggested optimizations, the strategy can further enhance its adaptability and stability. For live trading, thorough backtesting and parameter optimization are recommended, with adjustments made according to specific market characteristics.

Source Pine Script

/*backtest
start: 2025-02-16 17:00:00
end: 2025-02-18 03:00:00
period: 2m
basePeriod: 2m
exchanges: [{"eid":"Binance","currency":"SOL_USDT"}]
*/

//@version=6
strategy("Inverted FVG Strategy with Trend Check and Trailing Stops", overlay=true)

// Function to detect FVG
fvgDetected(src, high, low) =>
    var float prevHigh = na
    var float prevLow = na
    var float prevClose = na
    var bool fvg = false
    if (not na(src[1]))
        prevHigh := high[1]
        prevLow := low[1]
        prevClose := src[1]
        if (src > prevClose and low > prevHigh) or (src < prevClose and high < prevLow)
            fvg := true
    [fvg, prevHigh, prevLow]

// Detect FVG on the chart
[fvg, fvgHigh, fvgLow] = fvgDetected(close, high, low)

// Detect IFVG - Inversion of FVG
var bool ifvg = false
var float ifvgHigh = na
var float ifvgLow = na
if (fvg)
    if not na(fvgHigh) and not na(fvgLow)
        if (close > fvgHigh and close[1] < fvgHigh) or (close < fvgLow and close[1] > fvgLow)
            ifvg := true
            ifvgHigh := close > fvgHigh ? high : na
            ifvgLow := close < fvgLow ? low : na

// Plot FVG and IFVG zones for visualization
bgcolor(ifvg ? color.new(color.red, 80) : na)
plot(ifvgHigh, title="IFVG High", color=color.red, linewidth=2, style=plot.style_cross)
plot(ifvgLow, title="IFVG Low", color=color.red, linewidth=2, style=plot.style_cross)

// Trend Check using Simple Moving Averages
smaShort = ta.sma(close, 50)  // Short term SMA
smaLong = ta.sma(close, 200)  // Long term SMA
var bool uptrend = false
var bool downtrend = false

uptrend := smaShort > smaLong  // Up trend if short SMA is above long SMA
downtrend := smaShort < smaLong  // Down trend if short SMA is below long SMA

// Plot SMAs for visualization
plot(smaShort, title="SMA Short", color=color.blue, linewidth=1)
plot(smaLong, title="SMA Long", color=color.orange, linewidth=1)

// Trading logic with trend confirmation
longCondition = ifvg and close < ifvgLow and uptrend
shortCondition = ifvg and close > ifvgHigh and downtrend

// Risk Definition
stopLoss = 100  // Example values in points
risk = stopLoss

if (longCondition)
    strategy.entry("Long", strategy.long)
    strategy.exit("Initial Long Exit", "Long", stop=close - stopLoss, limit=close + (risk * 3))  // Changed to 3R

if (shortCondition)
    strategy.entry("Short", strategy.short)
    strategy.exit("Initial Short Exit", "Short", stop=close + stopLoss, limit=close - (risk * 3))  // Changed to 3R

// ATR for dynamic trailing stop
atr = ta.atr(14)

// Trailing Stop for Long Position if the trade has moved > 0.5R
if (strategy.position_size > 0)
    if (close - strategy.position_avg_price >= risk * 0.5)
        trailingStopLong = math.max(strategy.position_avg_price + (risk * 0.5), close - (atr * 2))
        strategy.exit("Trailing Stop Long", "Long", stop=trailingStopLong)

// Trailing Stop for Short Position if the trade has moved > 0.5R
if (strategy.position_size < 0)
    if (strategy.position_avg_price - close >= risk * 0.5)
        trailingStopShort = math.min(strategy.position_avg_price - (risk * 0.5), close + (atr * 2))
        strategy.exit("Trailing Stop Short", "Short", stop=trailingStopShort)

Published by ianzeng123 on the FMZ strategy square · last modified 2025-02-21. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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