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Strategy vault / Mean reversion

Trend Reversal Strategy Based on ADX Indicator

This strategy is named "Trend Reversal Strategy Based on ADX Indicator". It uses the ADX indicator to gauge trend strength and capture reversal opportunities when overbought/oversold. ADX stands for Average…

Pine ScriptMean reversionTrend followingADX / DMI
Author
ChaoZhang
Complexity
Intermediate · 32 lines
Parameters
7
Backtest bar
2h · intraday
Tested on
BTC/USDT · futures
Jump to codeView in vaultOriginal on FMZ

This strategy is named "Trend Reversal Strategy Based on ADX Indicator". It uses the ADX indicator to gauge trend strength and capture reversal opportunities when overbought/oversold.

ADX stands for Average Directional Index, reflecting the strength of a trend. The higher the ADX value, the stronger the trend. ADX above 25 suggests a significant trend is present.

DMI includes DI+ and DI- lines. DI+ above DI- shows an uptrend, while DI- above DI+ flags a downtrend.

The trading logic is:

  1. When ADX is above 45, the trend is considered very steep.

  2. If DI+ is below DI- then, it signals an oversold state and trend reversal opportunity, going long.

  3. Conversely, if DI- is below DI+, it suggests overbought conditions and reversal opportunity for going short.

  4. Take profit timely after reversal.

The advantage is using ADX to determine strong trend reversal points. High ADX values filter out false signals from ranging markets effectively. But ADX parameters need optimization, and stop loss is also important.

In conclusion, ADX is adept at gauging strong trend reversal timing. But traders still need to watch more factors, using ADX as just one supplementary indicator.

Parameters

NameDefaultWhat it controls
v_input_1trueFrom Month
v_input_2trueFrom Day
v_input_32021From Year
v_input_4trueThru Month
v_input_5trueThru Day
v_input_62112Thru Year
v_input_7trueShow Date Range

Source Pine Script

/*backtest
start: 2023-08-13 00:00:00
end: 2023-09-12 00:00:00
period: 2h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
strategy(shorttitle='DMI swings',title='DMI swings', overlay=true, initial_capital = 100, 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)

//Backtest dates
fromMonth = input(defval = 1,    title = "From Month",      type = input.integer, minval = 1, maxval = 12)
fromDay   = input(defval = 1,    title = "From Day",        type = input.integer, minval = 1, maxval = 31)
fromYear  = input(defval = 2021, title = "From Year",       type = input.integer, minval = 1970)
thruMonth = input(defval = 1,    title = "Thru Month",      type = input.integer, minval = 1, maxval = 12)
thruDay   = input(defval = 1,    title = "Thru Day",        type = input.integer, minval = 1, maxval = 31)
thruYear  = input(defval = 2112, title = "Thru Year",       type = input.integer, minval = 1970)

showDate  = input(defval = true, title = "Show Date Range", type = input.bool)

start     = timestamp(fromYear, fromMonth, fromDay, 00, 00)        // backtest start window
finish    = timestamp(thruYear, thruMonth, thruDay, 23, 59)        // backtest finish window
window()  => true        // create function "within window of time"

[pos_dm, neg_dm, avg_dm] = dmi(14, 14)

//Entry 
strategy.entry(id="long", long = true, when = avg_dm > 45 and pos_dm < neg_dm and window())

//Exit
strategy.close("long", when = avg_dm > 45 and pos_dm > neg_dm and window())

Published by ChaoZhang on the FMZ strategy square · last modified 2023-09-13. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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