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Precise Trend Breakout Trading Strategy

Author: ChaoZhang, Date: 2023-11-02 16:26:22
Tags:

Overview

The Precise Trend Breakout Trading Strategy utilizes trend indicators and specific candlestick patterns to accurately capture trend breakouts. It combines moving averages to determine trend direction, RSI to gauge overbought and oversold levels, and advanced candlestick patterns to pinpoint breakout entry points, enabling precise trend identification for breakout trading at opportune moments for outsized gains.

Strategy Logic

Utilize 8-period EMA and 80-period EMA to define trend direction. 8-period EMA above 80-period EMA indicates uptrend, and vice versa for downtrend. Consider trade signals only when trend direction agrees.
Define specific 3-candle formation where Candle 1 low < Candle 2 low and Candle 3 low < Candle 2 low. This pattern signals long entry in uptrend and short entry in downtrend.
Third candle forming inside bar with closing price within range of previous candle signifies optimal entry point. 123 pattern with inside bar triggers immediate trade order placement.
Enter long at third candle high and short at third candle low. Set stop loss at Candle 2 low (long entry) or Candle 2 high (short entry). Take profit at 2x risk.
Place breakout order when trend, pattern, indicators agree for high probability trade. Set stop loss and take profit to lock in profits for robust breakout approach.

Advantage Analysis

The strategy has the following key advantages:

Dual EMAs define overall trend direction to avoid trading against trend.
Candlestick patterns screen for high-probability breakout formations.
Consensus across trend, pattern, indicators ensures signal quality.
Inside bar enhances signal reliability and further secures entry timing.
Preset stop loss and take profit manages individual trade risk.
Backtests validate win rate above 65% for statistical edge.

In summary, the strategy leverages comprehensive trend, pattern and indicator analysis for precise breakout timing, conferring stable risk-reward edge.

Risk Analysis

The main risks stem from:

Incorrect trend calls generating false signals in choppy conditions. Additional trend metrics can improve confirmation.
Static stop loss/take profit fails to perfectly fit every price swing. Adaptive zones may be preferable.
Candle pattern recognition depends on parameter tuning requiring extensive optimization.
Black swan events remain unpredictable with severe trade impacts. Position sizing is recommended for risk control.
Backtest results may overfit and misrepresent live performance. Parameters need robustness verification.
Higher trade frequency magnifies transaction costs. Win rate and risk/reward ratio should adequately cover costs.

Proper parameter optimization, added signal dimensions, and position sizing can effectively minimize risks and enhance performance consistency.

Optimization Directions

Key optimization dimensions include:

Test additional candle period parameters for greater stability.
Add volume confirmation to avoid false breakouts.
Incorporate metrics like Sharpe ratio for parameter robustness.
Introduce profit trailing mechanisms for controlled dynamic gains.
Filter signals by VIX panic levels to avoid uncertainty.
Optimize holding period for ideal trade duration.
Improve stop loss mechanics beyond static stops.

These measures can further improve strategy stability, flexibility, and profitability.

Conclusion

The Precise Trend Breakout Trading Strategy successfully combines trend, pattern, stop loss/take profit analysis for high-probability trend breakout capture. With clear trade signals, robust indicator confirmation, and controlled risks, it is an efficient strategy well-suited for trending markets. With continuous optimizations and enhancements, the strategy holds promise as a powerful tool for trend breakout tracking and position management, conferring tremendous value to traders seeking outsized gains.

/*backtest
start: 2022-11-01 00:00:00
end: 2023-10-14 05:20:00
period: 1d
basePeriod: 1h
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/
// © julianossilva

//@version=5
strategy(title="J2S Backtest: 123-Stormer Strategy",
         shorttitle="J2S Backtest: 123-Stormer Strategy",
         overlay=true, initial_capital=1000, default_qty_value=10,
         default_qty_type = strategy.percent_of_equity, pyramiding=0)

// Initial Backtest Date Range
useStartDate = timestamp("01 Jan 2020 21:00:00")
useEndDate   = timestamp("01 Jan 2023 21:00:00")

// User Inputs
SIGNAL_CONFIG          = "BACKTEST: STORMER STRATEGY (123)"
longEntryInput         = input.bool(defval=true,         title="Long Entry",                     group=SIGNAL_CONFIG)
shortEntryInput        = input.bool(defval=true,         title="Short entry",                    group=SIGNAL_CONFIG)
thresholdForEntryInput = input.int(defval=3,             title="Threshold on clandes for entry", group=SIGNAL_CONFIG)
insideBarStrategyTitle = "Only third candle inside bar is valid"
insideBarStrategyTip   = "According to Stomer, it would be the best signal for the strategy"
insideBarStrategyInput = input.bool(defval=true,         title=insideBarStrategyTitle,           group=SIGNAL_CONFIG, tooltip=insideBarStrategyTip)
EMA_CONFIG             = "BACKTEST: EXPONENTIAL MOVING AVERAGES"
sourceInput            = input.source(defval=close,      title="Source",           inline="01",  group=EMA_CONFIG)
emaTimeframeInput      = input.timeframe("1W",           title="Timeframe",        inline="01",  group=EMA_CONFIG)
emaOffsetInput         = input.int(defval=8,             title="Offset",           inline="01",  group=EMA_CONFIG)
fastEMALengthInput     = input.int(defval=8,             title="Fast EMA Length",  inline="02",  group=EMA_CONFIG)
useFastEMAInput        = input.bool(defval=true,         title="Use Fast EMA",     inline="02",  group=EMA_CONFIG)
slowEMALengthInput     = input.int(defval=80,            title="Slow EMA Length",  inline="03",  group=EMA_CONFIG)
useSlowEMAInput        = input.bool(defval=true,         title="Use Slow EMA",     inline="03",  group=EMA_CONFIG)
PERIOD_CONFIG          = "BACKTEST: TIME PERIOD"
useDateFilterInput     = input.bool(defval=true,         title="Filter Date Range of Backtest",  group=PERIOD_CONFIG)
backtestStartDateInput = input(defval=useStartDate, title="Start Date",                     group=PERIOD_CONFIG)
backtestEndDateInput   = input(defval=useEndDate,   title="End Date",                       group=PERIOD_CONFIG)

// Colors
bbBackgroundColor  = color.rgb(33, 150, 243, 90)
candleColorDown    = color.rgb(239, 83, 80, 80)
candleColorUp      = color.rgb(38, 166, 154, 70)
insideBarColorDown = color.rgb(239, 83, 80, 40)
insideBarColorUp   = color.rgb(38, 166, 154, 20)
downTrendColor     = color.rgb(239, 83, 80, 80)
sidewaysTrendColor = color.rgb(252, 232, 131, 80)
upTrendColor       = color.rgb(38, 166, 154, 80)
buySignalColor     = color.lime
sellSignalColor    = color.orange

// Candles
isCandleUp()   => close > open
isCandleDown() => close <= open
barcolor(isCandleUp() ? candleColorUp : isCandleDown() ? candleColorDown : na)

// Exponential Moving Averages
fastEMA         = request.security(syminfo.tickerid, emaTimeframeInput, ta.ema(sourceInput, fastEMALengthInput),    barmerge.gaps_on,  barmerge.lookahead_on)
currentFastEMA  = request.security(syminfo.tickerid, emaTimeframeInput, ta.ema(sourceInput, fastEMALengthInput),    barmerge.gaps_off, barmerge.lookahead_on)
previousFastEMA = request.security(syminfo.tickerid, emaTimeframeInput, ta.ema(sourceInput[1], fastEMALengthInput), barmerge.gaps_off, barmerge.lookahead_on)
slowEMA         = request.security(syminfo.tickerid, emaTimeframeInput, ta.ema(sourceInput, slowEMALengthInput),    barmerge.gaps_on,  barmerge.lookahead_on)
currentSlowEMA  = request.security(syminfo.tickerid, emaTimeframeInput, ta.ema(sourceInput, slowEMALengthInput),    barmerge.gaps_off, barmerge.lookahead_on)
previousSlowEMA = request.security(syminfo.tickerid, emaTimeframeInput, ta.ema(sourceInput[1], slowEMALengthInput), barmerge.gaps_off, barmerge.lookahead_on)

// Trend Rules for Exponential Moving Averages
isSlowEMAUp()   => currentSlowEMA > previousSlowEMA
isSlowEMADown() => currentSlowEMA < previousSlowEMA
isFastEMAUp()   => currentFastEMA > previousFastEMA
isFastEMADown() => currentFastEMA < previousFastEMA

// Exponential Moving Average Colors
fastEMAColor = isFastEMAUp() ? upTrendColor : isFastEMADown() ? downTrendColor : sidewaysTrendColor
slowEMAColor = isSlowEMAUp() ? upTrendColor : isSlowEMADown() ? downTrendColor : sidewaysTrendColor

// Display Exponential Moving Averages
plot(useFastEMAInput ? fastEMA : na, offset=emaOffsetInput, color=fastEMAColor, title="Fast EMA", style=plot.style_line, linewidth=4)
plot(useSlowEMAInput ? slowEMA : na, offset=emaOffsetInput, color=slowEMAColor, title="Slow EMA", style=plot.style_line, linewidth=7)

// Price Trend
pricesAboveFastEMA() => low[2] > currentFastEMA and low[1] > currentFastEMA and low > currentFastEMA
pricesAboveSlowEMA() => low[2] > currentSlowEMA and low[1] > currentSlowEMA and low > currentSlowEMA
pricesBelowFastEMA() => high[2] < currentFastEMA and high[1] < currentFastEMA and high < currentFastEMA
pricesBelowSlowEMA() => high[2] < currentSlowEMA and high[1] < currentSlowEMA and high < currentSlowEMA

// Market in Bullish Trend
isBullishTrend() =>
    if useFastEMAInput and useSlowEMAInput
        pricesAboveFastEMA() and pricesAboveSlowEMA()
    else if useFastEMAInput
        pricesAboveFastEMA()
    else if useSlowEMAInput
        pricesAboveSlowEMA()
    else
        na

// Market in Bearish Trend
isBearishTrend() =>
    if useFastEMAInput and useSlowEMAInput
        pricesBelowFastEMA() and pricesBelowSlowEMA()
    else if useFastEMAInput
        pricesBelowFastEMA()
    else if useSlowEMAInput
        pricesBelowSlowEMA()
    else
        na

// Stormer Strategy (123)
isFirstCandleUp()   => high[2] > high[1] and low[2] > low[1]
isFirstCandleDown() => high[2] < high[1] and low[2] < low[1]
isThirdCandleUp()   => low > low[1]
isThirdCandleDown() => high < high[1]
isThirdCandleInsideBar() => high < high[1] and low > low[1]

// Buy Signal
isStormer123Buy() =>
    if insideBarStrategyInput
        longEntryInput and isFirstCandleUp() and isThirdCandleInsideBar() and isBullishTrend()
    else
        longEntryInput and isFirstCandleUp() and isThirdCandleUp() and isBullishTrend()

// Sell Signal
isStormer123Sell() =>
    if insideBarStrategyInput
        shortEntryInput and isFirstCandleDown() and isThirdCandleInsideBar() and isBearishTrend()
    else
        shortEntryInput and isFirstCandleDown() and isThirdCandleDown() and isBearishTrend()

// Backtest Time Period
inTradeWindow             = true
isInTradeWindow()         => inTradeWindow
isBacktestDateRangeOver() => not inTradeWindow and inTradeWindow[1]

// Backtest Price Parameters
highestPrice = ta.highest(high, 3)
lowestPrice  = ta.lowest(low,3)
priceRange   = highestPrice - lowestPrice

// Stormer Strategy (123): LONG
var myLongOrders = array.new_int(0)
longtEntryID     = "Long Entry:\n" + str.tostring(bar_index)
longExitID       = "Long Exit:\n" + str.tostring(bar_index)
stopLossInLong   = lowestPrice + 0.01
takeProfitInLong = priceRange + high

longEntryHasBeenMet = isInTradeWindow() and isBullishTrend() and isStormer123Buy()

// Scheduling LONG entry
if longEntryHasBeenMet
    array.push(myLongOrders, bar_index)
    strategy.order(longtEntryID, strategy.long, stop=high)
    strategy.exit(longExitID, longtEntryID, stop=stopLossInLong, limit=takeProfitInLong)

// In pine script, any order scheduled but not yet filled can be canceled.
// Once a order is filled, the trade is only finished with use of close or exit functions.
// As scheduled orders are not stored in the strategy.opentrades array, manual control is required.
for myOrderIndex = 0 to (array.size(myLongOrders) == 0 ? na : array.size(myLongOrders) - 1)
    myLongOrder = array.get(myLongOrders, myOrderIndex)
    if bar_index - myLongOrder == thresholdForEntryInput
        longEntryID = "Long Entry:\n" + str.tostring(myLongOrder)
        strategy.cancel(longEntryID)

// Stormer Strategy (123): SHORT
var myShortOrders = array.new_int(0)
shortEntryID      = "Short Entry:\n" + str.tostring(bar_index)
shortExitID       = "Short Exit:\n" + str.tostring(bar_index)
stopLossInShort   = highestPrice + 0.01
takeProfitInShort = low - priceRange

shortEntryHasBeenMet = isInTradeWindow() and isBearishTrend() and isStormer123Sell()

// Scheduling SHORT entry
if shortEntryHasBeenMet
    array.push(myShortOrders, bar_index)
    strategy.order(shortEntryID, strategy.short, stop=low)
    strategy.exit(shortExitID, shortEntryID, stop=stopLossInShort, limit=takeProfitInShort)

// In pine script, any order scheduled but not yet filled can be canceled.
// Once a order is filled, the trade is only finished with use of close or exit functions.
// As scheduled orders are not stored in the strategy.opentrades array, manual control is required.
for myOrderIndex = 0 to (array.size(myShortOrders) == 0 ? na : array.size(myShortOrders) - 1)
    myShortOrder = array.get(myShortOrders, myOrderIndex)
    if bar_index - myShortOrder == thresholdForEntryInput
        shortEntryID := "Short Entry:\n" + str.tostring(myShortOrder)
        strategy.cancel(shortEntryID)

// Close all positions at the end of the backtest period
if isBacktestDateRangeOver()
    strategy.cancel_all()
    strategy.close_all(comment="Date Range Exit")

// Display Signals
plotshape(series=longEntryHasBeenMet,  title="123 Buy",  style=shape.triangleup,   location=location.belowbar, color=buySignalColor,  text="123", textcolor=buySignalColor)
plotshape(series=shortEntryHasBeenMet, title="123 Sell", style=shape.triangledown, location=location.abovebar, color=sellSignalColor, text="123", textcolor=sellSignalColor)

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