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Combo Trend Tracking Strategy

Author: ChaoZhang, Date: 2024-01-02 10:41:30
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Overview

The combo trend tracking strategy is a quantitative trading strategy that combines double indicators to judge the trend. It first uses the 123 reversal indicator to determine price reversal signals, and then combines the directional trend index (DTI) to judge the price trend direction, so as to achieve double confirmation order signals.

Strategy Principle

The strategy consists of two main parts:

  1. 123 Reversal Indicator

    The judging principle of the 123 reversal indicator is:

    • When the closing price rises continuously for 2 days and the 9-day slow K-line is lower than 50, go long;

    • When the closing price falls continuously for 2 days and the 9-day fast K-line is higher than 50, go short.

    This can capture the timing point of price reversal.

  2. Directional Trend Index (DTI)

    The DTI indicator judging principle is: calculate the moving average of absolute price fluctuation over a period of time, and then divide it by the average volatility of price.

    • When DTI is higher than the overbought line, it means the current is a downward trend;

    • When DTI is lower than the oversold line, it means the current is a upward trend.

  3. Combination

    First, use the 123 reversal indicator to determine whether a price reversal signal occurs. Then, combined with the DTI indicator to determine the overall trend direction after the reversal.

    This avoids the problem of false reversal caused by relying solely on reversal signals, thereby improving the stability and profitability of strategies.

Advantages

  1. Double indicator confirmation avoids risks caused by false reversals

  2. Combining reversals and trends strikes a balance between operational flexibility and stability

  3. Large parameter optimization space, can be flexibly adjusted to adapt to different varieties

Risk Analysis

  1. Setting DTI parameters requires experience, inappropriate will misjudge the trend direction

  2. Reversal does not necessarily represent a new trend, there may be range-bound oscillations

  3. Need effective stop loss to control single loss

    ​ Solutions: Parameter optimization test + Reasonable stop loss + Combination of other indicators

Optimization Direction

  1. Test DTI parameters to find optimal parameter combinations

  2. Use other indicators to filter out false reversal signals

  3. Optimize stop loss strategies and find optimal stop loss points

Summary

The combo trend tracking strategy effectively determines the essentiality of price reversals and captures new trend directions through the double confirmation of 123 reversals and DTI, thereby improving the profitability of strategies. However, parameter settings and stop loss strategies still require continuous testing and optimization in order to maximize the profit space of strategies. Overall, by combining the advantages of trend trading and reversal trading, this is a worthwhile quantitative strategy to recommend.

/*backtest
start: 2023-12-25 00:00:00
end: 2024-01-01 00:00:00
period: 15m
basePeriod: 5m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
////////////////////////////////////////////////////////////
//  Copyright by HPotter v1.0 19/02/2020
// This is combo strategies for get a cumulative signal. 
//
// First strategy
// This System was created from the Book "How I Tripled My Money In The 
// Futures Market" by Ulf Jensen, Page 183. This is reverse type of strategies.
// The strategy buys at market, if close price is higher than the previous close 
// during 2 days and the meaning of 9-days Stochastic Slow Oscillator is lower than 50. 
// The strategy sells at market, if close price is lower than the previous close price 
// during 2 days and the meaning of 9-days Stochastic Fast Oscillator is higher than 50.
//
// Second strategy
// This technique was described by William Blau in his book "Momentum,
// Direction and Divergence" (1995). His book focuses on three key aspects 
// of trading: momentum, direction and divergence. Blau, who was an electrical 
// engineer before becoming a trader, thoroughly examines the relationship between 
// price and momentum in step-by-step examples. From this grounding, he then looks 
// at the deficiencies in other oscillators and introduces some innovative techniques, 
// including a fresh twist on Stochastics. On directional issues, he analyzes the 
// intricacies of ADX and offers a unique approach to help define trending and 
// non-trending periods.
// Directional Trend Index is an indicator similar to DM+ developed by Welles Wilder. 
// The DM+ (a part of Directional Movement System which includes both DM+ and 
// DM- indicators) indicator helps determine if a security is "trending." William 
// Blau added to it a zeroline, relative to which the indicator is deemed positive or 
// negative. A stable uptrend is a period when the DTI value is positive and rising, a 
// downtrend when it is negative and falling. 
//
// WARNING:
// - For purpose educate only
// - This script to change bars colors.
////////////////////////////////////////////////////////////
Reversal123(Length, KSmoothing, DLength, Level) =>
    vFast = sma(stoch(close, high, low, Length), KSmoothing) 
    vSlow = sma(vFast, DLength)
    pos = 0.0
    pos := iff(close[2] < close[1] and close > close[1] and vFast < vSlow and vFast > Level, 1,
	         iff(close[2] > close[1] and close < close[1] and vFast > vSlow and vFast < Level, -1, nz(pos[1], 0))) 
	pos

TDI(r,s,u,OS,OB) =>
    pos = 0.0
    xHMU = iff(high - high[1] > 0, high - high[1], 0)
    xLMD = iff(low - low[1] < 0, -(low - low[1]), 0)
    xPrice = xHMU - xLMD
    xPriceAbs = abs(xPrice)
    xuXA = ema(ema(ema(xPrice, r),s),u)
    xuXAAbs = ema(ema(ema(xPriceAbs, r),s),u)
    Val1 = 100 * xuXA
    Val2 = xuXAAbs
    DTI = iff(Val2 != 0, Val1 / Val2, 0)
    pos := iff(DTI > OS, -1,
    	     iff(DTI < OB, 1, nz(pos[1], 0))) 
    pos

strategy(title="Combo Backtest 123 Reversal & Directional Trend Index (DTI)", shorttitle="Combo", overlay = true)
Length = input(14, minval=1)
KSmoothing = input(1, minval=1)
DLength = input(3, minval=1)
Level = input(50, minval=1)
//-------------------------
r = input(14, minval=1)
s = input(10, minval=1)
u = input(5, minval=1)
OS = input(45, minval=1)
OB = input(-45, maxval=-1)
reverse = input(false, title="Trade reverse")
posReversal123 = Reversal123(Length, KSmoothing, DLength, Level)
posTDI = TDI(r,s,u,OS,OB)
pos = iff(posReversal123 == 1 and posTDI == 1 , 1,
	   iff(posReversal123 == -1 and posTDI == -1, -1, 0)) 
possig = iff(reverse and pos == 1, -1,
          iff(reverse and pos == -1 , 1, pos))	   
if (possig == 1) 
    strategy.entry("Long", strategy.long)
if (possig == -1)
    strategy.entry("Short", strategy.short)	 
if (possig == 0) 
    strategy.close_all()
barcolor(possig == -1 ? #b50404: possig == 1 ? #079605 : #0536b3 )
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