Trend Following Strategy with MACD and Donchian Channel

Pine ScriptBreakout Trend following Mean reversion MACD EMA SMA ATR Donchian

Author: ChaoZhang
Complexity: Intermediate · 83 lines
Parameters: 20
Backtest bar: 1h · intraday
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Overview

This strategy combines the Donchian Channel indicator and MACD indicator to determine the trend. It belongs to a typical trend following strategy. It goes long when the price breaks out the upper band and MACD shows golden cross, and goes short when the price breaks the lower band and MACD shows death cross. The ATR indicator is used to calculate the stop loss.

Strategy Logic

Calculate the MACD indicator, including fast line, slow line and histogram.
Calculate the upper and lower Donchian Channel bands. The upper band is the highest price over N days, the lower band is the lowest price over N days.
When the price breaks the upper band, and the MACD fast line crosses above the slow line, go long.
When the price breaks the lower band, and the MACD fast line crosses below the slow line, go short.
Use ATR indicator to calculate the stop loss for this strategy, which is set to ATR value multiplied by a coefficient from the current price.
Close the position when a reverse signal appears.

Advantage Analysis

This strategy combines trend judgment indicators and channel indicators, which can effectively track trends. MACD indicator judges price trend and momentum. Donchian Channel judges direction. The ATR stop loss limits the loss per trade.

Advantages are:

The strategy is simple with few parameters, easy to implement.
It can open position along the trend, and capture trend opportunities in time.
ATR stop loss controls risk.
Drawdown can be controlled to some extent.

Risk Analysis

There are also some risks:

Improper parameter settings of Donchian Channel may cause false signals.
Improper MACD parameters may also lead to lagging signals.
A too wide stop loss setting may lead to expanded loss.
Sharp market reversal may lead to huge loss.
The strategy tends to overtrade.

Solutions:

Optimize parameters, select stocks cautiously.
Strict stop loss, trailing stop loss.
Adjust position sizing properly.

Optimization Directions

The strategy can be optimized in the following aspects:

Optimize MACD parameters to improve sensitivity.
Optimize stop loss algorithm to make it closer to price.
Add position sizing mechanism according to trend strength.
Add filters to avoid false signals.
Add selection criteria for trading instruments.
Add judgement of trading time period.

Summary

In summary, this is a typical trend following strategy. It combines Donchian Channel for trend direction and MACD for trend strength. It can follow the trend effectively and control risk. By optimizing parameters, stop loss, position sizing etc, the stability and profitability can be further improved. The strategy suits investors who require high accuracy in trend judgment.

Parameters

Name	Default	What it controls
v_input_1	12	Fast Length
v_input_2	26	Slow Length
v_input_3_close	0	Source: close \| high \| low \| open \| hl2 \| hlc3 \| hlcc4 \| ohlc4
v_input_int_1	9	Signal Smoothing
v_input_string_1	0	Oscillator MA Type: EMA \| SMA
v_input_string_2	0	Signal Line MA Type: EMA \| SMA
v_input_4	#2962FF	(?Color Settings)MACD Line
v_input_5	#FF6D00	Signal Line
v_input_6	#26A69A	(?Histogram)Above Grow
v_input_7	#B2DFDB	Fall
v_input_8	#FFCDD2	Below Grow
v_input_9	#FF5252	Fall
v_input_int_2	50	(?Donchian Channels Inputs)Length Upper Channel
v_input_int_3	50	Length Lower Channel
v_input_color_1	purple	Fill Color
v_input_color_2	orange	Color Upper Channel
v_input_color_3	orange	Color Lower Channel
v_input_int_4	14	(?ATR Inputs)ATR Period
v_input_10	0.01	Risk Per Trade
v_input_11	2	ATR Multiplier

Source Pine Script

/*backtest
start: 2023-10-15 00:00:00
end: 2023-11-14 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/
// © Robrecht99

//@version=5
strategy("Trend Following with Donchian Channels and MACD", overlay=false, margin_long=100, margin_short=100, pyramiding=3)

// MACD //
fast_length = input(title="Fast Length", defval=12)
slow_length = input(title="Slow Length", defval=26)
src = input(title="Source", defval=close)
signal_length = input.int(title="Signal Smoothing",  minval = 1, maxval = 50, defval = 9)
sma_source = input.string(title="Oscillator MA Type",  defval="EMA", options=["SMA", "EMA"])
sma_signal = input.string(title="Signal Line MA Type", defval="EMA", options=["SMA", "EMA"])

col_macd = input(#2962FF, "MACD Line  ", group="Color Settings", inline="MACD")
col_signal = input(#FF6D00, "Signal Line  ", group="Color Settings", inline="Signal")
col_grow_above = input(#26A69A, "Above   Grow", group="Histogram", inline="Above")
col_fall_above = input(#B2DFDB, "Fall", group="Histogram", inline="Above")
col_grow_below = input(#FFCDD2, "Below Grow", group="Histogram", inline="Below")
col_fall_below = input(#FF5252, "Fall", group="Histogram", inline="Below")

fast_ma = sma_source == "SMA" ? ta.sma(src, fast_length) : ta.ema(src, fast_length)
slow_ma = sma_source == "SMA" ? ta.sma(src, slow_length) : ta.ema(src, slow_length)
macd = fast_ma - slow_ma
signal = sma_signal == "SMA" ? ta.sma(macd, signal_length) : ta.ema(macd, signal_length)
hist = macd - signal
plot(hist, title="Histogram", style=plot.style_columns, color=(hist>=0 ? (hist[1] < hist ? col_grow_above : col_fall_above) : (hist[1] < hist ? col_grow_below : col_fall_below)))
plot(macd, title="MACD", color=col_macd)
plot(signal, title="Signal", color=col_signal)

// Donchian Channels //

Length1 = input.int(title="Length Upper Channel", defval=50, minval=1, group="Donchian Channels Inputs")
Length2 = input.int(title="Length Lower Channel", defval=50, minval=1, group="Donchian Channels Inputs")
h1 = ta.highest(high[1], Length1)
l1 = ta.lowest(low[1], Length2)
fillColor = input.color(color.new(color.purple, 95), title = "Fill Color", group = "Donchian Channels Inputs")
upperColor = input.color(color.new(color.orange, 0), title = " Color Upper Channel", group = "Donchian Channels Inputs", inline = "upper")
lowerColor = input.color(color.new(color.orange, 0), title = " Color Lower Channel", group = "Donchian Channels Inputs", inline = "lower")
u = plot(h1, "Upper", color=upperColor)
l = plot(l1, "Lower", color=upperColor)
fill(u, l, color=fillColor)

//ATR and Position Size //
strategy.initial_capital = 50000
length = input.int(title="ATR Period", defval=14, minval=1, group="ATR Inputs")
risk = input(title="Risk Per Trade", defval=0.01, group="ATR Inputs")
multiplier = input(title="ATR Multiplier", defval=2, group="ATR Inputs")
atr = ta.atr(length)
amount = (risk * strategy.initial_capital / (multiplier * atr))

// Buy and Sell Conditions //

entrycondition1 = ta.crossover(macd, signal)
entrycondition2 = macd > signal
entrycondition3 = macd and signal > hist
sellcondition1 = ta.crossover(signal, macd)
sellcondition2 = signal > macd
sellcondition3 = macd and signal < hist

// Buy and Sell Signals //

if (close > h1 and entrycondition2 and entrycondition3)
    strategy.entry("long", strategy.long, qty=amount)
    stoploss = close - atr * 4
    strategy.exit("exit sl", stop=stoploss, trail_offset=stoploss)
if (sellcondition1 and sellcondition2 and sellcondition3)
    strategy.close(id="long")

if (close < l1 and sellcondition2 and sellcondition3)
    strategy.entry("short", strategy.short, qty=amount)
    stoploss = close + atr * 4
    strategy.exit("exit sl", stop=stoploss, trail_offset=stoploss)
if (entrycondition1 and entrycondition2 and entrycondition3)
    strategy.close(id="short")

Published by ChaoZhang on the FMZ strategy square · last modified 2023-11-15. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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