Overlay Trend Signals Strategy

Pine ScriptTrend following Mean reversion Momentum EMA ADX / DMI

Author: ChaoZhang
Complexity: Starter · 87 lines
Parameters: 5
Backtest bar: 4h · intraday
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Overview

This strategy generates trading signals by calculating the Directional Movement Indexes (DMI) DI+ and DI- along with Average Directional Index (ADX) and Exponential Moving Average (EMA). It triggers a long signal when DI+ crosses above DI- and ADX is above 20. A short signal is triggered when DI- crosses below DI+ and ADX is above 25. The stop loss signal is when DI- crosses above DI+ with ADX above 30.

Strategy Logic

Calculate DI+, DI-, ADX
- Use ta.dmi() to compute DI+, DI-, ADX
- DI+/DI- measures directional price movement
- ADX measures strength of price movement
Calculate Exponential Moving Average
- Use custom my_ema() function to compute EMA
- EMA smoothes price data
Generate trading signals
- Long signal: DI+ crosses above DI- and ADX > 20 and close > EMA
  - Indicates upward trend and increased volatility
- Short signal: DI- crosses below DI+ and ADX > 25 and close < EMA
  - Indicates downward trend and high volatility
Set stop loss
- Long stop loss: DI- crosses above DI+ and ADX > 30
  - Indicates trend reversal
- Short stop loss: DI+ crosses below DI- and ADX > 30
  - Indicates trend reversal

In summary, this strategy combines momentum and trend analysis indicators to trade when strong price trends emerge, with stop losses to limit losses.

Advantage Analysis

Dual DI avoids false signals
- Single DI can give false signals, dual DI ensures trend
ADX threshold requires increased volatility
- Only trades high volatility moves, avoids ranging
EMA complements DI
- EMA identifies mid/long term trends
Strict stop loss
- Cuts losses quickly

Risk Analysis

Frequent stop loss
- Volatile swings may trigger frequent stops
Parameter dependence
- Optimal DI and ADX parameters need to be found
Low trade frequency
- Strict rules reduce trades

Can optimize by expanding stop loss, tuning parameters, adding filters to increase frequency.

Optimization Opportunities

Parameter optimization
- Optimize DI and ADX parameters
Add filters
- Volume, divergence etc.
Widen stop loss
- Relax stops to reduce frequency

Conclusion

This strategy combines momentum and trend analysis indicators to trade strong trends, with strict stops to control risk. Can further improve performance through parameter optimization, additional filters, and relaxed stops.

Parameters

Name	Default	What it controls
v_input_int_1	14	DI Length
v_input_int_2	14	ADX Smoothing
v_input_int_3	26	EMA Length
v_input_source_1_close	0	EMA Source: close \| high \| low \| open \| hl2 \| hlc3 \| hlcc4 \| ohlc4
v_input_bool_1	true	Signal Labels

Source Pine Script

/*backtest
start: 2024-01-01 00:00:00
end: 2024-01-31 23:59:59
period: 4h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

// This Pine Script™ code is subject to the terms of the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/
// © Tamil_FNO_Trader

//@version=5
strategy("Overlay Signals by TFOT", overlay=true)

// Calculate DMI
len = input.int(14, minval=1, title="DI Length")
lensig = input.int(14, title="ADX Smoothing", minval=1, maxval=50)
[diplus, diminus, adx] = ta.dmi(len, lensig)

// Get EMA
emalen = input.int(26, minval=1, title = "EMA Length")
emasrc = input.source(close, title = "EMA Source")

my_ema(src, length) =>
    alpha = 2 / (length + 1)
    sum = 0.0
    sum := na(sum[1]) ? src : alpha * src + (1 - alpha) * nz(sum[1])
EMA2 = my_ema(emasrc, emalen)

// Variables
var bool buycondition1 = false
var bool sellcondition1 = false

var int firstbuybar = na
var int firstsellbar = na

var int buyexitbar = na
var int sellexitbar = na

var bool buyexit1 = false
var bool sellexit1 = false

// Buy & Sell Conditions
buycondition1 := (ta.crossover(diplus, diminus)) and (adx > 20) and (close > EMA2) and na(firstbuybar)
sellcondition1 := (ta.crossover(diminus, diplus)) and (adx > 25) and (close < EMA2) and na(firstsellbar)

buyexit1 := ta.crossover(diminus, diplus) and (adx > 30) and na(buyexitbar)
sellexit1 := ta.crossover(diplus, diminus) and (adx > 30) and na(sellexitbar)

if buycondition1
    if(na(firstbuybar))
        firstbuybar := bar_index
        buyexitbar := na
        firstsellbar := na
        strategy.entry("Buy", strategy.long)

if sellcondition1
    if(na(firstsellbar))
        firstsellbar := bar_index
        sellexitbar := na
        firstbuybar := na
        strategy.entry("Sell", strategy.short)

if buyexit1 and not na(firstbuybar)
    if(na(buyexitbar))
        buyexitbar := bar_index
        firstbuybar := na
        firstsellbar := na
        strategy.close("Buy")

if sellexit1 and not na(firstsellbar)
    if(na(sellexitbar))
        sellexitbar := bar_index
        firstsellbar := na
        firstbuybar := na
        strategy.close("Sell")

// Plot signals on chart
hl = input.bool(defval = true, title = "Signal Labels")

plotshape(hl and buycondition1 and bar_index == firstbuybar ? true : na, "Buy", style = shape.labelup, location = location.belowbar, color = color.green, text = "Buy", textcolor = color.white, size = size.tiny)
plotshape(hl and sellcondition1 and bar_index == firstsellbar ? true : na, "Sell", style = shape.labeldown, location = location.abovebar, color = color.red, text = "Sell", textcolor = color.white, size = size.tiny)

plotshape(hl and buyexit1 and bar_index == buyexitbar ? true : na, "Buy Exit", style = shape.labelup, location = location.belowbar, color = color.red, text = "Buy X", textcolor = color.white, size = size.tiny)
plotshape(hl and sellexit1 and bar_index == sellexitbar ? true : na, "Sell Exit", style = shape.labeldown, location = location.abovebar, color = color.red, text = "Sell X", textcolor = color.white, size = size.tiny)

Published by ChaoZhang on the FMZ strategy square · last modified 2024-02-18. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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