Stochastic Moving Average Strategy

This strategy combines Exponential Moving Average (EMA) with Stochastic Oscillator in a trend following and continuation manner, along with some cool functionalities. I designed this strategy especially for trading…

Pine ScriptMean reversion Trend following Volatility EMA SMA ATR Stochastic

Author: ChaoZhang
Complexity: Intermediate · 167 lines
Parameters: 26
Backtest bar: 1h · intraday
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Overview

Strategy Logic

The strategy has 4 mandatory conditions to unlock a trading signal. Find these conditions for a long trade below (works the exact other way round for shorts)

Fast EMA must be higher than Slow EMA
Stochastic K% line must be in overbought territory
Stochastic K% line must cross over Stochastic D% line
Price as to close between slow EMA and fast EMA Once all the conditions are true, a trade will start at the opening of the next candle.

Advantage Analysis

The strategy combines the advantages of EMA and Stochastic to effectively capture the start and continuation of trends, suitable for medium and long term operations. At the same time, the strategy provides many customizable parameters for users to adjust based on their trading style and market characteristics.

Specifically, the advantages of the strategy include:

EMA crossings judge trend direction and enhance signal stability and reliability
Stochastic judges overbought and oversold levels to find reversal opportunities
Combining two indicators, it has both trend following and mean reversion
ATR automatically calculates stop loss distance, adjusting stops based on market volatility
Customizable risk reward ratio to meet needs of different users
Provides multiple customizable parameters for users to adjust based on markets

Risk Analysis

The main risks of this strategy come from:

EMA crossings may have false breaks, thus generating incorrect signals
Stochastic itself has lagging properties, may miss best timing for price reversals
A single strategy cannot fully adapt to constantly changing market environments

To mitigate above risks, we can take following measures:

Adjust EMA period parameters to avoid too many false signals
Incorporate more indicators to judge trends and support levels to ensure reliable signals
Define clear money management strategies to control risk exposure per trade
Adopt combinational strategies so different strategies can verify signals and improve stability

Optimization Directions

The strategy can be further optimized in following aspects:

Add volatility based position adjustment module. Reduce size when volatility surges and increase when calms down.
Add judgement of higher timeframe trends to avoid counter trend operations, e.g. combining daily or weekly trends.
Add machine learning models to aid signal generation. Train classification models based on historical data.
Optimize money management modules to make stops and sizes more intelligent.

Conclusion

This strategy integrates the pros of both trend following and mean reversion, considering both higher timeframe market environments and current price behaviors. It is an effective strategy worth real time tracking and testing. Through continuous optimization on parameters, adding trend judgement modules etc, there is still large room for performance improvement, worth pouring in more research efforts.

Parameters

Name	Default	What it controls
v_input_bool_1	true	(? Trade Setup)Long Trades
v_input_bool_2	true	Short Trades
v_input_float_1	true	Risk : Reward
v_input_bool_3	false	Risk = % Equity
v_input_float_2	true	riskPrctEqui
v_input_bool_4	false	Risk = $ Amount
v_input_float_3	1000	riskUSD
v_input_float_4	true	(? Stop Loss)ATR Multiplier
v_input_int_1	14	ATR Lookback
v_input_int_2	14	(? Stochastic)K%
v_input_int_3	3	D%
v_input_int_4	80	OB
v_input_int_5	20	OS
v_input_int_6	false	Stoch. OB/OS lookback
v_input_bool_5	false	All must be OB/OS
v_input_color_1	#00ffff
v_input_color_2	#333333
v_input_int_7	50
v_input_int_8	21	(? Exp. Moving Average)Fast EMA
v_input_int_9	50	Slow EMA
v_input_color_3	#0066ff
v_input_color_4	#0000ff
v_input_bool_6	false	(? Reference Market)Reference Market Filter
v_input_1	BTC_USDT:swap	Market
v_input_timeframe_1	30	Timeframe
v_input_int_10	50	EMA Length

Source Pine Script

/*backtest
start: 2023-11-18 00:00:00
end: 2023-12-18 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/
// © LucasVivien

// Since this Strategy may have its stop loss hit within the opening candle, consider turning on 'Recalculate : After Order is filled' in the strategy settings, in the "Properties" tabs

//@version=5
strategy("Stochastic Moving Average", shorttitle="Stoch. EMA", overlay=true, default_qty_type= strategy.cash, initial_capital=10000, default_qty_value=100)

//==============================================================================
//==============================   USER INPUT   ================================
//==============================================================================

var g_tradeSetup = "     Trade Setup"
activateLongs  = input.bool (title="Long Trades"        , defval=true                                       , inline="A1", group=g_tradeSetup, tooltip="")
activateShorts = input.bool (title="Short Trades"       , defval=true                                       , inline="A1", group=g_tradeSetup, tooltip="")
rr             = input.float(title="Risk : Reward"      , defval=1   , minval=0, maxval=100       , step=0.1, inline=""  , group=g_tradeSetup, tooltip="")
RiskEquity     = input.bool (title="Risk = % Equity    ", defval=false                                      , inline="A2", group=g_tradeSetup, tooltip="Set stop loss size as a percentage of 'Initial Capital' -> Strategy Parameter -> Properties tab (Low liquidity markets will affect will prevent to get an exact amount du to gaps)")
riskPrctEqui   = input.float(title=""                   , defval=1   , minval=0, maxval=100       , step=0.1, inline="A2", group=g_tradeSetup, tooltip="")
RiskUSD        = input.bool (title="Risk = $ Amount   " , defval=false                                      , inline="A3", group=g_tradeSetup, tooltip="Set stop loss size as a fixed Base currency amount (Low liquidity markets will affect will prevent to get an exact amount du to gaps)")
riskUSD        = input.float(title=""                   , defval=1000, minval=0, maxval=1000000000, step=100, inline="A3", group=g_tradeSetup, tooltip="")

var g_stopLoss = "     Stop Loss"
atrMult = input.float(title="ATR Multiplier", defval=1 , minval=0, maxval=100 , step=0.1, tooltip="", inline="", group=g_stopLoss)
atrLen  = input.int  (title="ATR Lookback"  , defval=14, minval=0, maxval=1000, step=1  , tooltip="", inline="", group=g_stopLoss)

var g_stochastic = "     Stochastic"
Klen            = input.int  (title="K%"                   , defval=14, minval=0, maxval=1000, step=1, inline="S2", group=g_stochastic, tooltip="")
Dlen            = input.int  (title=" D%"                  , defval=3 , minval=0, maxval=1000, step=1, inline="S2", group=g_stochastic, tooltip="")
OBstochLvl      = input.int  (title="OB"                   , defval=80, minval=0, maxval=100 , step=1, inline="S1", group=g_stochastic, tooltip="")
OSstochLvl      = input.int  (title=" OS"                  , defval=20, minval=0, maxval=100 , step=1, inline="S1", group=g_stochastic, tooltip="")
OBOSlookback    = input.int  (title="Stoch. OB/OS lookback", defval=0 , minval=0, maxval=100 , step=1, inline=""  , group=g_stochastic, tooltip="This option allow to look 'x' bars back for a value of the Stochastic K line to be overbought or oversold when detecting an entry signal (if 0, looks only at current bar. if 1, looks at current and previous and so on)")
OBOSlookbackAll = input.bool (title="All must be OB/OS"    , defval=false                            , inline=""  , group=g_stochastic, tooltip="If turned on, all bars within the Stochastic K line lookback period must be overbought or oversold to return a true signal")
entryColor      = input.color(title="   "                  , defval=#00ffff                          , inline="S3", group=g_stochastic, tooltip="")
baseColor       = input.color(title="  "                   , defval=#333333                          , inline="S3", group=g_stochastic, tooltip="Will trun to designated color when stochastic gets to opposite extrem zone of current trend / Number = transparency")
transp          = input.int  (title="   "                  , defval=50, minval=0, maxval=100, step=10, inline="S3", group=g_stochastic, tooltip="")

var g_ema = "     Exp. Moving Average"
ema1len = input.int  (title="Fast EMA     ", defval=21, minval=0, maxval=1000, step=1, inline="E1", group=g_ema, tooltip="")
ema2len = input.int  (title="Slow EMA     ", defval=50, minval=0, maxval=1000, step=1, inline="E2", group=g_ema, tooltip="")
ema1col = input.color(title="     "        , defval=#0066ff                          , inline="E1", group=g_ema, tooltip="")
ema2col = input.color(title="     "        , defval=#0000ff                          , inline="E2", group=g_ema, tooltip="")

var g_referenceMarket ="     Reference Market"
refMfilter = input.bool     (title="Reference Market Filter", defval=false            , inline="", group=g_referenceMarket)
market     = input   (title="Market"                 , defval="BTC_USDT:swap", inline="", group=g_referenceMarket)
res        = input.timeframe(title="Timeframe"              , defval="30"             , inline="", group=g_referenceMarket)
len        = input.int      (title="EMA Length"             , defval=50               , inline="", group=g_referenceMarket)


//==============================================================================
//==========================   FILTERS & SIGNALS   =============================
//==============================================================================

//------------------------------   Stochastic   --------------------------------
K = ta.stoch(close, high, low, Klen)
D = ta.sma(K, Dlen)
stochBullCross = ta.crossover(K, D)
stochBearCross = ta.crossover(D, K)
OSstoch = false
OBstoch = false
for i = 0 to OBOSlookback
    if K[i] < OSstochLvl
        OSstoch := true
    else 
        if OBOSlookbackAll
            OSstoch := false
for i = 0 to OBOSlookback
    if K[i] > OBstochLvl
        OBstoch := true
    else 
        if OBOSlookbackAll
            OBstoch := false

//----------------------------   Moving Averages   -----------------------------
ema1 = ta.ema(close, ema1len)
ema2 = ta.ema(close, ema2len)
emaBull = ema1 > ema2
emaBear = ema1 < ema2

//----------------------------   Price source   --------------------------------
bullRetraceZone = (close < ema1 and close >= ema2) 
bearRetraceZone = (close > ema1 and close <= ema2)

//---------------------------   Reference market   -----------------------------
ema      = ta.ema(close, len)
emaHTF   = request.security(market, res, ema  [barstate.isconfirmed ? 0 : 1])
closeHTF = request.security(market, res, close[barstate.isconfirmed ? 0 : 1])

bullRefMarket = (closeHTF > emaHTF or closeHTF[1] > emaHTF[1])
bearRefMarket = (closeHTF < emaHTF or closeHTF[1] < emaHTF[1])

//--------------------------   SIGNAL VALIDATION   -----------------------------
validLong  = stochBullCross and OSstoch and emaBull and bullRetraceZone 
 and activateLongs  and (refMfilter ? bullRefMarket : true) and strategy.position_size == 0
validShort = stochBearCross and OBstoch and emaBear and bearRetraceZone 
 and activateShorts and (refMfilter ? bearRefMarket : true) and strategy.position_size == 0


//==============================================================================
//===========================   STOPS & TARGETS   ==============================
//==============================================================================

SLdist      = ta.atr(atrLen) * atrMult
longSL      = close - SLdist
longSLDist  = close - longSL
longTP      = close + (longSLDist * rr)
shortSL     = close + SLdist
shortSLDist = shortSL - close
shortTP     = close - (shortSLDist * rr)
var SLsaved = 0.0
var TPsaved = 0.0
if validLong or validShort
    SLsaved := validLong ? longSL : validShort ? shortSL : na
    TPsaved := validLong ? longTP : validShort ? shortTP : na


//==============================================================================
//==========================   STRATEGY COMMANDS   =============================
//==============================================================================
 
if validLong 
    strategy.entry("Long", strategy.long, 
     qty = RiskEquity ? ((riskPrctEqui/100)*strategy.equity)/longSLDist : RiskUSD ? riskUSD/longSLDist : na)
if validShort 
    strategy.entry("Short", strategy.short, 
     qty = RiskEquity ? ((riskPrctEqui/100)*strategy.equity)/shortSLDist  : RiskUSD ? riskUSD/shortSLDist : na)

strategy.exit(id="Long Exit" , from_entry="Long" , limit=TPsaved, stop=SLsaved, when=strategy.position_size > 0)
strategy.exit(id="Short Exit", from_entry="Short", limit=TPsaved, stop=SLsaved, when=strategy.position_size < 0)


//==============================================================================
//=============================   CHART PLOTS   ================================
//==============================================================================
    
//----------------------------   Stops & Targets   -----------------------------
plot(strategy.position_size != 0 or (strategy.position_size[1] != 0 and strategy.position_size == 0) ? SLsaved : na,
 color=color.red  , style=plot.style_linebr)
plot(strategy.position_size != 0 or (strategy.position_size[1] != 0 and strategy.position_size == 0) ? TPsaved : na,
 color=color.green, style=plot.style_linebr) 

//---------------------------------   EMAs   -----------------------------------
l1 = plot(ema1, color=#0066ff, linewidth=2)
l2 = plot(ema2, color=#0000ff, linewidth=2)

//--------------------------   Stochastic gradient   ---------------------------
// fill(l1, l2, color.new(color.from_gradient(K, OSstochLvl, OBstochLvl,
//  emaBull ? entryColor : emaBear ? baseColor : na, 
//  emaBull ? baseColor  : emaBear ? entryColor : na), transp))
    
//----------------------------   Trading Signals   -----------------------------
plotshape(validLong, color=color.green, location=location.belowbar, style=shape.xcross, size=size.small)
plotshape(validShort, color=color.red , location=location.abovebar, style=shape.xcross, size=size.small)

//----------------------------   Reference Market   ----------------------------
bgcolor(bullRefMarket and refMfilter ? color.new(color.green,90) : na)
bgcolor(bearRefMarket and refMfilter ? color.new(color.red  ,90) : na)

Published by ChaoZhang on the FMZ strategy square · last modified 2023-12-19. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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