Quantitative Trading Strategy Based on Stoch and EMA

This article explains in detail a quantitative trading strategy combining the Stoch indicator and EMA moving average. It generates trading signals based on Stoch values and uses EMA to filter out non-mainstream…

Pine ScriptMean reversion Trend following RSI EMA SMA Stochastic

Author: ChaoZhang
Complexity: Intermediate · 114 lines
Parameters: 21
Backtest bar: 1h · intraday
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

I. Strategy Logic

The main tools and logic are:

Calculate Stoch indicator with K and D values, where K reflects fast price changes and D is the smoothed signal.
Set overbought/oversold zones for the Stoch. Signals are based on relative values of K and D.
Compute EMA over a period to gauge the price mainstream trend.
Only take trades when Stoch signals agree with EMA direction.
Establish long/short positions on signals with stop loss and take profit.

Together, Stoch captures overbought/oversold opportunities and EMA filters out invalid signals, forming a robust strategy.

II. Advantages of the Strategy

The biggest advantage is the complementarity of indicators. Stoch judges O/S levels and EMA the mainstream trend, combining to reduce mistakes.

Also, adjustable K/D values allow optimization across different products.

Finally, the stop loss/take profit clearly defines risk/reward for prudent money management.

III. Potential Weaknesses

However, some potential issues are:

Firstly, both Stoch and EMA can lag, causing missed optimal entries.

Secondly, tight stops may prematurely trigger many invalidations.

Lastly, extensive parameter optimization is required to avoid overfitting.

IV. Summary

In summary, this article has explained a quantitative strategy combining Stoch and EMA. It identifies overbought/oversold reversal chances, with EMA filtering out invalid signals. With proper tuning, this strategy can achieve steady profits but needs to manage the mentioned risks.

Parameters

Name	Default	What it controls
v_input_int_3	14	RSI Length
v_input_int_4	14	Stochastic Length
v_input_1_close	0	RSI Source: close \| high \| low \| open \| hl2 \| hlc3 \| hlcc4 \| ohlc4
v_input_string_1	0	Long Signal Type: Stoch Below Value \| K&D Cross Below Value \| Stoch CrossUp the Value
v_input_string_2	0	Short Signal Type: Stoch Above Value \| K&D Cross Above Value \| Stoch CrossDown the Value
v_input_float_1	false	(?TP / SL)Take Profit (%) [0 = Disabled]
v_input_float_2	false	Stop Loss (%) [0 = Disabled]
v_input_int_1	true	(?Stochastic)K Smoothing
v_input_int_2	3	D Smoothing
v_input_2_close	0	(?EMA)Source EMA : close \| high \| low \| open \| hl2 \| hlc3 \| hlcc4 \| ohlc4
v_input_3	200	Length EMA
v_input_4	20	(?Signal Options)Stoch below/cross this value for Long signals
v_input_5	80	Stoch above/cross this value for Short signals
v_input_6	timestamp(01 Jan 2014 00:00 +0000)	(?Backtesting)Backtesting Start Time
v_input_7	timestamp(01 Jan 2100 23:59 +0000)	Backtesting End Time
v_input_string_3	deribit-testnet	(?PV Settings)Exchange
v_input_string_4	btc-perpetual	Symbol
v_input_string_5		Account
v_input_string_6		PV Alert Name Longs
v_input_string_7		PV Alert Name Shorts
v_input_string_8		PV Alert Name TP/SL

Source Pine Script

/*backtest
start: 2023-08-15 00:00:00
end: 2023-08-26 00:00:00
period: 1h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

// This source code is subject to the terms of the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/

//@version=5
strategy(title="EMA Stoch Strategy For ProfitView", overlay=true, calc_on_every_tick=true, process_orders_on_close=true, default_qty_type=strategy.percent_of_equity, default_qty_value=100, commission_type=strategy.commission.percent, commission_value=0.1, initial_capital=1000)

// take profit e stop loss
TakeProfitPercent = input.float(defval = 0.0, title="Take Profit (%) [0 = Disabled]",minval = 0, step=.25,group='TP / SL')
StopLossPercent = input.float(defval = 0.0, title="Stop Loss (%) [0 = Disabled]",minval = 0, step=.25,group='TP / SL')

// Stoch
smoothK = input.int(1, title="K Smoothing", minval=1,group='Stochastic')
periodD = input.int(3, title="D Smoothing", minval=1,group='Stochastic')
lenghtRSI= input.int(14, "RSI Length", minval=1) 
lenghtStoch = input.int(14, "Stochastic Length", minval=1)
src = input(close, title="RSI Source")

rsi1 = ta.rsi(src, lenghtRSI)
k = ta.sma(ta.stoch(rsi1, rsi1, rsi1, lenghtStoch), smoothK)
d = ta.sma(k, periodD)

plot(k, title="K", color=#2962FF)
plot(d, title="D", color=#FF6D00)
// bgcolor(color=color.from_gradient(k, 0, 100, color.new(#2962FF, 100), color.new(#2962FF, 95)), title="K BG")
// bgcolor(color=color.from_gradient(d, 0, 100, color.new(#FF6D00, 100), color.new(#FF6D00, 95)), title="D BG")


// ema
src1= input(close,title='Source EMA ',group='EMA')
len1= input(200,title='Length EMA ',group='EMA')
ema1= ta.ema(src1,len1)
plot(ema1,title='EMA',color= color.blue ,linewidth=2)

// signals
LongVal= input(20,title='Stoch below/cross this value for Long signals',group='Signal Options')
scegliLong= input.string('Stoch Below Value', options= ['Stoch Below Value' , 'K&D Cross Below Value' , 'Stoch CrossUp the Value'] , title='Long Signal Type')

long1=  scegliLong == 'Stoch Below Value' ?  k < LongVal and d < LongVal and close > ema1 : na
long2=  scegliLong == 'K&D Cross Below Value' ? ta.cross(k,d) and k < LongVal and d < LongVal and close > ema1 : na
long3=  scegliLong == 'Stoch CrossUp the Value' ? ta.crossover(k,LongVal) and close > ema1 : na

shortVal= input(80,title='Stoch above/cross this value for Short signals',group='Signal Options')
scegliShort= input.string('Stoch Above Value', options= ['Stoch Above Value' , 'K&D Cross Above Value' , 'Stoch CrossDown the Value'] , title='Short Signal Type' )

short1= scegliShort == 'Stoch Above Value' ? k > shortVal and d > shortVal and close < ema1 : na
short2= scegliShort == 'K&D Cross Above Value' ?  ta.cross(k,d) and k > shortVal and d > shortVal and close < ema1 : na
short3= scegliShort == 'Stoch CrossDown the Value' ?  ta.crossunder(k,shortVal) and close < ema1 : na


//  Strategy Backtest Limiting Algorithm/
i_startTime = input(defval = timestamp("01 Jan 2014 00:00 +0000"), title = "Backtesting Start Time", inline="timestart", group='Backtesting')
i_endTime = input(defval = timestamp("01 Jan 2100 23:59 +0000"), title = "Backtesting End Time", inline="timeend", group='Backtesting')
timeCond = true

pv_ex = input.string("deribit-testnet", title="Exchange", group='PV Settings')
pv_sym = input.string("btc-perpetual", title="Symbol", group='PV Settings')
pv_acc = input.string("", title="Account", group='PV Settings')
pv_alert_long = input.string("", title="PV Alert Name Longs", group='PV Settings')
pv_alert_short = input.string("", title="PV Alert Name Shorts", group='PV Settings')
pv_alert_cancel = input.string("", title="PV Alert Name TP/SL", group='PV Settings')

profit_abs = (close * (TakeProfitPercent / 100))
stop_abs = (close * (StopLossPercent / 100))

ProfitTarget = TakeProfitPercent > 0 ? profit_abs / syminfo.mintick : na
LossTarget = StopLossPercent > 0 ? stop_abs / syminfo.mintick : na

// Make sure we are within the bar range, Set up entries and exit conditions
var entryprice = 0.0
var profitprice = 0.0
var stopprice = 0.0
exsym = pv_ex == "" ? "" : "ex=" + pv_ex + ","
exsym := pv_sym == "" ? exsym : exsym + "sym=" + pv_sym

if ((long1 or long2 or long3) and timeCond and strategy.position_size <= 0)
    strategy.entry("Long", strategy.long, when=barstate.isconfirmed)
    entryprice := close
    profitprice := entryprice+profit_abs
    stopprice := entryprice-stop_abs
    
    tpsl_str = TakeProfitPercent > 0 ? ",mytp=" + str.tostring(profitprice) : ""
    tpsl_str := StopLossPercent > 0 ? tpsl_str + ",mysl=" + str.tostring(stopprice) : tpsl_str
    alert(pv_alert_long + "(" + exsym + ",acc=" + pv_acc + tpsl_str +  ")", alert.freq_once_per_bar_close)

if ((short1 or short2 or short3) and timeCond and strategy.position_size >= 0)
    strategy.entry("Short", strategy.short, when=barstate.isconfirmed)
    entryprice := close
    profitprice := entryprice-profit_abs
    stopprice := entryprice+stop_abs
    
    tpsl_str = TakeProfitPercent > 0 ? ",mytp=" + str.tostring(profitprice) : ""
    tpsl_str := StopLossPercent > 0 ? tpsl_str + ",mysl=" + str.tostring(stopprice) : tpsl_str
    alert(pv_alert_short + "(" + exsym + ",acc=" + pv_acc + tpsl_str +  ")", alert.freq_once_per_bar_close)
    
tpsl_hit_long = (strategy.position_size[1] > 0 and ((TakeProfitPercent > 0 and high > profitprice[1]) or (StopLossPercent > 0 and low < stopprice[1])))
tpsl_hit_short = (strategy.position_size[1] < 0 and ((TakeProfitPercent > 0 and low < profitprice[1]) or (StopLossPercent > 0 and high > stopprice[1])))

if (tpsl_hit_long or tpsl_hit_short)
    alert(pv_alert_cancel + "(" + exsym + ",acc=" + pv_acc + ")", alert.freq_once_per_bar)


strategy.exit("Exit Long (TP/SL)", from_entry = "Long" , profit = ProfitTarget, loss = LossTarget)
strategy.exit("Exit Short (TP/SL)", from_entry = "Short", profit = ProfitTarget, loss = LossTarget)

plot(entryprice, title="Entry Price", color=strategy.opentrades > 0 ? color.gray : color.new(color.gray, 100))
plot(profitprice, title="Profit Price", color=strategy.opentrades > 0 and TakeProfitPercent > 0 ? color.green : color.new(color.green, 100))
plot(stopprice, title="Stop Price", color=strategy.opentrades > 0 and StopLossPercent > 0? color.red : color.new(color.red, 100))

Published by ChaoZhang on the FMZ strategy square · last modified 2023-09-15. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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