Williams VIX Fix Strategy

This strategy aims to predict market volatility of VIX by using Williams Vix Fix formula combined with Stochastic RSI and RSI indicators. It captures hidden bullish divergences to locate market bottoms and identify…

Pine ScriptMean reversion Trend following Volatility RSI SMA Bollinger Bands Stochastic

Author: ChaoZhang
Complexity: Intermediate · 95 lines
Parameters: 28
Backtest bar: 1d · swing
Tested on: BTC/USDT · futures

Jump to code View in vault Original on FMZ

Overview

Strategy Logic

The strategy is mainly based on the combination of Williams Vix Fix formula and Stochastic RSI & RSI indicators.

Firstly, the current period's VIX value is calculated by Williams Vix Fix formula through measuring the ratio of highest price to lowest price, which represents market volatility and panic levels. Upper and lower bollinger bands are set here, when VIX value is higher than the upper band, it indicates increased market fluctuation and investor panic; when lower than the lower band, it represents a stable market.

Secondly, the strategy adopts the combination of Stochastic RSI and RSI indicators. RSI is used to determine long/short positions, while Stoch RSI combines K & D lines to identify reversal points of RSI. Sell signals are generated when Stoch RSI falls from overbought zone.

Finally, the strategy integrates both by taking Stoch RSI's overbought signal as the basis for selling, and VIX value lower than lower bollinger band as the basis for buying, so as to capture market reversal points.

Advantage Analysis

The biggest advantage of this strategy is that it can utilize the strengths of two different indicators in combination.

Williams Vix Fix formula can effectively reflect market panic emotions. The dynamic adjustment of bollinger bands can adapt to different cycles. Stochastic RSI identifies RSI reversal points through the crossover of K & D lines, avoiding false signals.

The two combined can more accurately locate market reversal points. It generates sell signals when market panic index releases signals while utilizing Stoch RSI to determine specific entry points to avoid erroneous entries.

Risk Analysis

There are also some risks in this strategy:

Williams Vix Fix formula cannot fully reflect market panic emotions. Improper parameters of bollinger bands may generate wrong signals.
Reversal signals of Stoch RSI may also be wrong and needs to be verified with other indicators.
The strategy is relatively conservative and may miss opportunities if unable to track fast-moving markets timely.
The strategy may have larger drawdowns which requires careful position sizing.

We need to set parameters reasonably, verify with other indicators, and control position sizes to mitigate risks when using this strategy.

Optimization Directions

Some ways to optimize this strategy:

Optimize parameters of Williams Vix formula to more accurately reflect market panic levels. Combinations of moving averages can be considered.
Optimize parameters of Stoch RSI to find better combinations of K & D periods for higher reversal accuracy.
Add position sizing mechanisms like stop loss/take profit, or dynamic position adjustment based on drawdown/profit ratio.
Incorporate other indicators like MACD, KD to realize multi-indicator verification and reduce false signals.
Add machine learning algorithms, use big data to train models and auto-optimize parameters, improving stability.

Through above optimizations, the strategy's performance and stability can be significantly enhanced.

Conclusion

The Williams Vix Fix strategy captures market panic and stability transitions, and uses Stoch RSI to determine specific entry points, effectively locating market bottoms. Its advantage lies in the combination of indicators, but there are also certain risks. We can strengthen the strategy by parameters optimization and multi-indicator verification, making it an effective tool to locate market reversals.

Parameters

Name	Default	What it controls
v_input_1	14	lookback length of Stochastic
v_input_2	80	Stochastic overbought condition
v_input_3	20	Stochastic oversold condition
v_input_4	3	smoothing of Stochastic %K
v_input_5	3	moving average of Stochastic %K
v_input_6	14	lookback length of RSI
v_input_7	70	RSI overbought condition
v_input_8	30	RSI oversold condition
v_input_9	22	LookBack Period Standard Deviation High
v_input_10	20	Bolinger Band Length
v_input_11	2	Bollinger Band Standard Devaition Up
v_input_12	50	Look Back Period Percentile High
v_input_13	0.85	Highest Percentile - 0.90=90%, 0.95=95%, 0.99=99%
v_input_14	false	-------Text Plots Below Use Original Criteria-------
v_input_15	false	Show Text Plot if WVF WAS True and IS Now False
v_input_16	false	Show Text Plot if WVF IS True
v_input_17	false	-------Text Plots Below Use FILTERED Criteria-------
v_input_18	true	Show Text Plot For Filtered Entry
v_input_19	true	Show Text Plot For AGGRESSIVE Filtered Entry
v_input_20	40	Long-Term Look Back Current Bar Has To Close Below This Value OR Medium Term--Default=40
v_input_21	14	Medium-Term Look Back Current Bar Has To Close Below This Value OR Long Term--Default=14
v_input_22	3	Entry Price Action Strength--Close > X Bars Back---Default=3
v_input_23	false	-------------------------Turn On/Off ALERTS Below---------------------
v_input_24	false	----To Activate Alerts You HAVE To Check The Boxes Below For Any Alert Criteria You Want----
v_input_25	false	Show Alert WVF = True?
v_input_26	false	Show Alert WVF Was True Now False?
v_input_27	false	Show Alert WVF Filtered?
v_input_28	false	Show Alert WVF AGGRESSIVE Filter?

Source Pine Script

/*backtest
start: 2022-09-21 00:00:00
end: 2023-09-27 00:00:00
period: 1d
basePeriod: 1h
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
//Divergence and Hidden Divergence correlating with the Money Flow Index

strategy("Vix FIX / StochRSI Strategy", pyramiding=9, initial_capital=10000, default_qty_type=strategy.percent_of_equity,overlay=false)

///////////// Stochastic Slow
Stochlength = input(14, minval=1, title="lookback length of Stochastic")
StochOverBought = input(80, title="Stochastic overbought condition")
StochOverSold = input(20, title="Stochastic oversold condition")
smoothK = input(3, title="smoothing of Stochastic %K ")
smoothD = input(3, title="moving average of Stochastic %K")
k = sma(stoch(close, high, low, Stochlength), smoothK)
d = sma(k, smoothD)

 
///////////// RSI 
RSIlength = input( 14, minval=1 , title="lookback length of RSI")
RSIOverBought = input( 70  , title="RSI overbought condition")
RSIOverSold = input( 30  , title="RSI oversold condition")
RSIprice = close
vrsi = rsi(RSIprice, RSIlength)

///////////// Double strategy: RSI strategy + Stochastic strategy

pd = input(22, title="LookBack Period Standard Deviation High")
bbl = input(20, title="Bolinger Band Length")
mult = input(2.0    , minval=1, maxval=5, title="Bollinger Band Standard Devaition Up")
lb = input(50  , title="Look Back Period Percentile High")
ph = input(.85, title="Highest Percentile - 0.90=90%, 0.95=95%, 0.99=99%")
new = input(false, title="-------Text Plots Below Use Original Criteria-------" )
sbc = input(false, title="Show Text Plot if WVF WAS True and IS Now False")
sbcc = input(false, title="Show Text Plot if WVF IS True")
new2 = input(false, title="-------Text Plots Below Use FILTERED Criteria-------" )
sbcFilt = input(true, title="Show Text Plot For Filtered Entry")
sbcAggr = input(true, title="Show Text Plot For AGGRESSIVE Filtered Entry")
ltLB = input(40, minval=25, maxval=99, title="Long-Term Look Back Current Bar Has To Close Below This Value OR Medium Term--Default=40")
mtLB = input(14, minval=10, maxval=20, title="Medium-Term Look Back Current Bar Has To Close Below This Value OR Long Term--Default=14")
str = input(3, minval=1, maxval=9, title="Entry Price Action Strength--Close > X Bars Back---Default=3")
//Alerts Instructions and Options Below...Inputs Tab
new4 = input(false, title="-------------------------Turn On/Off ALERTS Below---------------------" )
new5 = input(false, title="----To Activate Alerts You HAVE To Check The Boxes Below For Any Alert Criteria You Want----")
sa1 = input(false, title="Show Alert WVF = True?")
sa2 = input(false, title="Show Alert WVF Was True Now False?")
sa3 = input(false, title="Show Alert WVF Filtered?")
sa4 = input(false, title="Show Alert WVF AGGRESSIVE Filter?")

//Williams Vix Fix Formula
wvf = ((highest(close, pd)-low)/(highest(close, pd)))*100
sDev = mult * stdev(wvf, bbl)
midLine = sma(wvf, bbl)
lowerBand = midLine - sDev
upperBand = midLine + sDev
rangeHigh = (highest(wvf, lb)) * ph

//Filtered Bar Criteria
upRange = low > low[1] and close > high[1]
upRange_Aggr = close > close[1] and close > open[1]
//Filtered Criteria
filtered = ((wvf[1] >= upperBand[1] or wvf[1] >= rangeHigh[1]) and (wvf < upperBand and wvf < rangeHigh))
filtered_Aggr = (wvf[1] >= upperBand[1] or wvf[1] >= rangeHigh[1]) and not (wvf < upperBand and wvf < rangeHigh)

//Alerts Criteria
alert1 = wvf >= upperBand or wvf >= rangeHigh ? 1 : 0
alert2 = (wvf[1] >= upperBand[1] or wvf[1] >= rangeHigh[1]) and (wvf < upperBand and wvf < rangeHigh) ? 1 : 0
alert3 = upRange and close > close[str] and (close < close[ltLB] or close < close[mtLB]) and filtered ? 1 : 0
alert4 = upRange_Aggr and close > close[str] and (close < close[ltLB] or close < close[mtLB]) and filtered_Aggr ? 1 : 0

//Coloring Criteria of Williams Vix Fix
col = wvf >= upperBand or wvf >= rangeHigh ? lime : gray

isOverBought = (crossover(k,d) and k > StochOverBought) ? 1 : 0
isOverBoughtv2 = k > StochOverBought ? 1 : 0
filteredAlert = alert3 ? 1 : 0
aggressiveAlert = alert4 ? 1 : 0

plot(isOverBought, "Overbought / Crossover", style=line, color=red) 
plot(filteredAlert, "Filtered Alert", style=line, color=fuchsia) 
plot(aggressiveAlert, "Aggressive Alert", style=line, color=orange)

if (filteredAlert or aggressiveAlert)
    strategy.entry("Long", strategy.long)

if (isOverBought)
    strategy.close("Long")

Published by ChaoZhang on the FMZ strategy square · last modified 2023-09-28. Collected in the Quant Trading Vault. Unvalidated research: re-test with your own data and costs before trusting it.

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