WaveTrend and CMF Based Trend Following Strategy

This strategy combines WaveTrend indicator and Chaikin Money Flow (CMF) indicator to identify trend direction and follow trends. It runs on 15-minute timeframe, using WaveTrend to determine price trend and CMF to…

Pine ScriptTrend following Mean reversion EMA SMA

Author: ChaoZhang
Complexity: Intermediate · 67 lines
Parameters: 12
Backtest bar: 1m · intraday
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Overview

Strategy Logic

WaveTrend indicator can effectively identify the trend direction of prices. It consists of channel midline, channel average and channel index. The channel midline is an exponential moving average of price, reflecting price trend. The channel average is a moving average of channel midline, used to locate channel midline. The channel index reflects the degree of deviation of price from channel midline and generates overbought/oversold signals.

The CMF indicator can judge the inflow and outflow of funds and confirm trends. This indicator is based on the accumulation/distribution line adjusted by volume, reflecting the comparison of buying and selling power. A value around 0 indicates a balance between fund inflow and outflow. Below 0 indicates fund outflow and above 0 indicates fund inflow.

This strategy runs on 15-minute timeframe. It first uses WaveTrend indicator to determine price trend direction, then uses CMF indicator to confirm, so as to follow trends. Specifically, when WaveTrend channel index is below -60 and CMF is less than -0.2, it goes long. When WaveTrend channel index is above 60 and CMF is greater than 0.2, it goes short. The exit conditions are mainly based on CMF indicator - it closes long position when CMF is greater than 0.18, and closes short position when CMF is less than -0.18.

Advantage Analysis

WaveTrend indicator can effectively determine price trend direction.
CMF indicator can confirm trend direction and avoid wrong trades.
Combining WaveTrend and CMF can achieve ultra short-term trend following.
15-minute timeframe makes it more suitable for short-term trading.

Risk Analysis

WaveTrend may generate wrong signals during consolidation.
CMF may lag and miss trend turning points.
Trading on single timeframe has higher risks, should expand holding period.
Lack of stop loss strategy, unable to control single loss.

Solutions:

Add other indicators for confirmation to avoid wrong signals.
Adjust CMF parameters for higher sensitivity.
Expand holding period to lower risks on single timeframe.
Add moving stop loss, breakeven stop etc to control loss.

Optimization

Add position sizing for better trend following.
Add stop loss strategy to limit single loss.
Add indicators like stochastics to avoid errors from single indicator.
Test different holding periods to find optimal.
Optimize CMF parameters to find best combination.

Summary

This strategy uses WaveTrend to determine trend and CMF to confirm, for ultra short-term trend following. Its advantages lie in reasonable indicator combination and effective trend following, with 15-minute timeframe making it suitable for short-term trading. But risks exist such as inaccurate signals and overshort holding period. Future improvements like stop loss, parameter optimization and more signal filtering can further enhance its stability and profitability.

Parameters

Name	Default	What it controls
v_input_1	20	Length
v_input_2	0	Aggregation: SUM \| EMA \| WMA
v_input_3	10	Volume Exponent (0-10 reduces & 10+ increases volume effect)
v_input_4	false	Show in Percentage
v_input_5	false	Factor in Price (Money Volume)
v_input_6_hlc3	0	Source for price factor: hlc3 \| high \| low \| open \| hl2 \| close \| hlcc4 \| ohlc4
v_input_7	10	Channel Length
v_input_8	21	Average Length
v_input_9	60	Over Bought Level 1
v_input_10	53	Over Bought Level 2
v_input_11	-60	Over Sold Level 1
v_input_12	-53	Over Sold Level 2

Source Pine Script

/*backtest
start: 2023-11-08 00:00:00
end: 2023-11-15 00:00:00
period: 1m
basePeriod: 1m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=3
strategy(title = "CMF - WaveTrend", shorttitle = "CMF - WaveTrend", overlay = true, pyramiding = 0, default_qty_type = strategy.percent_of_equity, default_qty_value = 100, currency = currency.EUR)

//Chaikin Money Flow

len = input(20, minval=1, title="Length")
mas = input(title="Aggregation", defval="SUM", options=["SUM", "EMA", "WMA"])
e = input(10.0, title="Volume Exponent (0-10 reduces & 10+ increases volume effect)")
p = input(false, title="Show in Percentage")
mvs = input(false, "Factor in Price (Money Volume)")
src=input(hlc3, title="Source for price factor")

trl = min(low,close[1]), trh = max(high,close[1]) // 'true range' fixes issues caused by gaps in price
wv = pow(volume,e/10.0)*(mvs ? src : 1)
ad = (trh==trl ? 0 : (2*close-(trh+trl))/tr(true))*wv
cmf = mas=="SUM" ? sum(ad, len)/sum(wv, len) : mas=="EMA" ? ema(ad, len)/ema(wv, len) : mas=="WMA" ? wma(ad, len)/wma(wv, len) : na
cmf_p  = if p
    50*cmf+50
else
    cmf
b = p ? 50 : 0


//WaveTrend
n1 = input(10, "Channel Length")
n2 = input(21, "Average Length")
obLevel1 = input(60, "Over Bought Level 1")
obLevel2 = input(53, "Over Bought Level 2")
osLevel1 = input(-60, "Over Sold Level 1")
osLevel2 = input(-53, "Over Sold Level 2")
 
ap = hlc3 
esa = ema(ap, n1)
d = ema(abs(ap - esa), n1)
ci = (ap - esa) / (0.015 * d)
tci = ema(ci, n2)
 
wt1 = tci
wt2 = sma(wt1,4)
// 


longCondition = wt1 < -60 and cmf < - 0.20
if (longCondition)
 
    strategy.entry("My Long Entry Id", strategy.long)
    
 
shortCondition = wt1 > 60 and cmf > 0.20
if (shortCondition)
 
    strategy.entry("My Short Entry Id", strategy.short)
    
closeLongCondition = cmf_p > 0.18 ? true : false
closeShortCondition = cmf_p < -0.18 ? true : false
    
    
strategy.close("My Long Entry Id", when=(closeLongCondition == true))
strategy.close("My Short Entry Id", when=(closeShortCondition == true))

Published by ChaoZhang on the FMZ strategy square · last modified 2023-11-16. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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