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Strategy vault / Breakout

VSTOP and RSI Trading Strategy

This strategy combines the VSTOP and RSI indicators to go long when RSI is overbought and go short when RSI is oversold, while using VSTOP to determine the trend direction and cut losses in time when the trend reverses.

Pine ScriptBreakoutMean reversionTrend followingRSIATRDonchian
Author
ChaoZhang
Complexity
Starter · 56 lines
Parameters
5
Backtest bar
1d · swing
Tested on
BTC/USDT · futures
Jump to codeView in vaultOriginal on FMZ

Overview

This strategy combines the VSTOP and RSI indicators to go long when RSI is overbought and go short when RSI is oversold, while using VSTOP to determine the trend direction and cut losses in time when the trend reverses.

Strategy Logic

  1. Calculate the RSI indicator value and set overbought and oversold lines. Go long when RSI is above the overbought line and go short when RSI is below the oversold line.

  2. Calculate the VSTOP, which is a stop loss line based on price fluctuation range. The calculation steps are as follows:

    • Calculate the ATR indicator and set the ATR coefficient mult

    • Record the max price and min price

    • According to the uptrend state is_uptrend, calculate the current stop loss line: stop = is_uptrend ? max - mult * ATR : min + mult * ATR

    • Update the stop loss line: vstop1 = is_uptrend ? max(vstop_prev, stop) : min(vstop_prev, stop)

    • When trend reversal happens, reset the stop loss line vstop

  3. When RSI is oversold, if price crosses above VSTOP, go short; when RSI is overbought, go long.

Advantage Analysis

  • Combining trend indicator and overbought/oversold indicator helps capture reversal opportunities in trending markets.

  • Using VSTOP to set stop loss effectively controls risks.

  • Flexible RSI parameter settings can be optimized for different products.

  • VSTOP systematically trails stop loss without manual intervention.

Risks and Solutions

  • If ATR parameter is set too large or too small, the stop loss line would be meaningless. Different ATR parameters can be tested or combined with ATR average.

  • In range-bound markets, RSI may trigger frequent trading signals, increasing trading frequency and slippage cost. RSI parameters can be adjusted or extra filters added to reduce invalid signals.

  • Failed reversal is the main risk of this strategy. Traders need to watch larger timeframe trend direction to avoid counter trend trading. Long-term moving averages can be used to determine the trend.

Optimization Directions

  • Consider combining other indicators to filter out invalid signals, e.g. volume, Donchian Channel etc.

  • Optimize parameters based on backtest results to find the optimal parameter combination.

  • Research how to dynamically adjust the ATR coefficient for adaptation in different market environments.

  • Explore shutting down the strategy during high-risk periods.

Conclusion

This strategy integrates trend judgment and overbought/oversold levels to capture reversal opportunities in trending markets. VSTOP provides systematic stop loss management for risk control. The strategy can be further enhanced through parameter optimization and combining other indicators. Traders need to watch out for failed reversals, the main risk.

Parameters

NameDefaultWhat it controls
v_input_12RSI Period
v_input_230Oversold Level
v_input_370Overbought Level
v_input_42Vstop Length
v_input_52Vstop Mult

Source Pine Script

/*backtest
start: 2022-10-02 00:00:00
end: 2023-10-08 00:00:00
period: 1d
basePeriod: 1h
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=3
strategy("Vstop and RSI", overlay=true)

//RSI Section
length = input(2, "RSI Period") 
overSold = input(30, "Oversold Level") 
overBought = input(70, "Overbought Level") 
price = close 
vrsi = rsi (price, length) 

//VSTOP Section
vlength = input(2, "Vstop Length") 
mult = input(2, "Vstop Mult") 
atr_ = atr(vlength) 

max1=0.0 
min1=0.0 
is_uptrend_prev = false 
stop=0.0 
vstop_prev=0.0 
vstop1=0.0 
is_uptrend=false 
is_trend_changed=false 
max_ = 0.0 
min_ = 0.0 
vstop=0.0 

max1 := max(nz(max_[1]), close)
min1 := min(nz(min_[1]), close)


is_uptrend_prev := nz(is_uptrend[1], true)

stop := is_uptrend_prev ? max1 - mult * atr_ : min1 + mult * atr_
vstop_prev := nz(vstop[1])
vstop1 := is_uptrend_prev ? max(vstop_prev, stop) : min(vstop_prev, stop)
is_uptrend := close - vstop1 >= 0
is_trend_changed := is_uptrend != is_uptrend_prev
max_ := is_trend_changed ? close : max1
min_ := is_trend_changed ? close : min1
vstop := is_trend_changed ? is_uptrend ? max_ - mult * atr_ : min_ + mult * atr_ : vstop1
plot(vstop, color = is_uptrend ? green : red, style=cross, linewidth=2)

if vrsi > overBought
    strategy.entry("Buy", strategy.long, comment="Buy")
     
if vrsi < overSold and vstop > price
    strategy.entry("Sell", strategy.short, comment="Sell")

Published by ChaoZhang on the FMZ strategy square · last modified 2023-10-09. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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