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EMA and Stochastic RSI based Multi-timeframe Trend Following Trading Strategy

Author: ChaoZhang, Date: 2024-03-08 17:32:38
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Strategy Overview

The strategy, named “EMA and Stochastic RSI based Multi-timeframe Trend Following Trading Strategy”, utilizes two exponential moving averages (EMAs) with different periods and the Stochastic RSI indicator to capture medium to long-term market trends. The core idea is to determine trend direction based on EMA crossovers, while using Stochastic RSI as a confirmatory signal for trend strength and potential reversals. Positions are opened at the beginning of a trend and closed towards the end.

Strategy Principles

Calculate a fast EMA and a slow EMA. The default parameter for the fast EMA is 12, and 25 for the slow EMA. These can be adjusted based on market characteristics and trading frequency.
Determine bullish/bearish trend:

When the fast EMA crosses above the slow EMA, it generates a bullish signal
When the fast EMA crosses below the slow EMA, it generates a bearish signal

Trend confirmation: After a bullish/bearish signal appears, it requires 2 consecutive bullish/bearish candles to confirm the trend. This helps filter out false signals.
Use Stochastic RSI as an auxiliary judgment:

When the Stochastic RSI %K line crosses above the %D line, and %K is below 20, it generates an oversold signal, indicating a potential bullish reversal
When the Stochastic RSI %K line crosses below the %D line, and %K is above 80, it generates an overbought signal, indicating a potential bearish reversal

Trading rules:

Open a long position when the EMAs generate a bullish signal, and the Stochastic RSI is not in overbought territory
Open a short position when the EMAs generate a bearish signal, and the Stochastic RSI is not in oversold territory

Strategy Advantages

By using two EMAs with different periods, the strategy can better balance the sensitivity and reliability of trend capturing. Analysis shows that the 12/25 period EMA combination performs well for medium to long-term trends.
The trend confirmation mechanism can effectively filter out most false signals and improve the win rate.
Stochastic RSI serves as an auxiliary judgment, helping assess trend strength in the early stage and pre-warning potential reversals in the late stage.
The strategy logic is simple with few parameters, making it easy to understand and implement. It’s also applicable to various markets and instruments.

Risk Analysis

EMAs are lagging indicators and may result in significant slippage at the beginning of trend reversals.
Trend-following strategies typically underperform in choppy markets. This strategy lacks specific judgment for range-bound conditions.
Stochastic RSI may produce misleading signals during extreme market volatility, affecting judgment quality.
Fixed parameters may not adapt to all market conditions, requiring dynamic adjustments based on market characteristics.

Optimization Directions

Introduce volatility indicators like ATR to dynamically adjust EMA parameters and adapt to different market rhythms.
Add judgment for range-bound markets, such as combining Bollinger Bands width, to avoid frequent trades in choppy conditions.
Incorporate more auxiliary criteria on top of Stochastic RSI, such as changes in volume, to improve signal reliability.
Consider market correlations and introduce multi-asset intermarket signals to enhance the system’s risk resilience.

Summary

This strategy effectively leverages the strengths of EMAs and Stochastic RSI to form a medium to long-term trading approach based on trend following and momentum reversal. It captures trends through EMA crossovers, confirms trend strength and warns of reversals with Stochastic RSI, and improves signal quality with trend confirmation mechanisms. The three components organically combine to create a simple and effective quantitative trading strategy framework. Its main advantages lie in its concise logic, few parameters, low implementation difficulty, and wide applicability. However, the strategy also has inherent limitations such as large slippage and inability to adapt to choppy markets. Future enhancements can focus on dynamic parameter optimization, introducing more auxiliary criteria, and constructing inter-market linkage mechanisms. Overall, this is a quantitative trading strategy with ample room for optimization and promising application prospects.

/*backtest
start: 2023-03-02 00:00:00
end: 2024-03-07 00:00:00
period: 1d
basePeriod: 1h
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=5
strategy('[Jacky] Trader XO Macro Trend Scanner', overlay=true)

// Variables
var ok = 0
var countBuy = 0
var countSell = 0
src = input(close, title='OHLC Type')
i_fastEMA = input(12, title='Fast EMA')
i_slowEMA = input(25, title='Slow EMA')
i_defEMA = input(25, title='Consolidated EMA')

// Allow the option to show single or double EMA
i_bothEMAs = input(title='Show Both EMAs', defval=true)

// Define EMAs
v_fastEMA = ta.ema(src, i_fastEMA)
v_slowEMA = ta.ema(src, i_slowEMA)
v_biasEMA = ta.ema(src, i_defEMA)

// Color the EMAs
emaColor = v_fastEMA > v_slowEMA ? color.green : v_fastEMA < v_slowEMA ? color.red : #FF530D

// Plot EMAs
plot(i_bothEMAs ? na : v_biasEMA, color=emaColor, linewidth=3, title='Consolidated EMA')
plot(i_bothEMAs ? v_fastEMA : na, title='Fast EMA', color=emaColor)
plot(i_bothEMAs ? v_slowEMA : na, title='Slow EMA', color=emaColor)

// Colour the bars
buy = v_fastEMA > v_slowEMA
sell = v_fastEMA < v_slowEMA

if buy
    countBuy += 1
    countBuy

if buy
    countSell := 0
    countSell

if sell
    countSell += 1
    countSell

if sell
    countBuy := 0
    countBuy

buysignal = countBuy < 2 and countBuy > 0 and countSell < 1 and buy and not buy[1]
sellsignal = countSell > 0 and countSell < 2 and countBuy < 1 and sell and not sell[1]

barcolor(buysignal ? color.green : na)
barcolor(sellsignal ? color.red : na)

// Strategy backtest
if (buysignal)
    strategy.entry("Buy", strategy.long)

if (sellsignal)
    strategy.entry("Sell", strategy.short)

// Plot Bull/Bear

plotshape(buysignal, title='Bull', text='Bull', style=shape.triangleup, location=location.belowbar, color=color.new(color.green, 0), textcolor=color.new(color.black, 0), size=size.tiny)
plotshape(sellsignal, title='Bear', text='Bear', style=shape.triangledown, location=location.abovebar, color=color.new(color.red, 0), textcolor=color.new(color.black, 0), size=size.tiny)

bull = countBuy > 1
bear = countSell > 1

barcolor(bull ? color.green : na)
barcolor(bear ? color.red : na)

// Set Alerts

alertcondition(ta.crossover(v_fastEMA, v_slowEMA), title='Bullish EMA Cross', message='Bullish EMA crossover')
alertcondition(ta.crossunder(v_fastEMA, v_slowEMA), title='Bearish EMA Cross', message='Bearish EMA Crossover')

// Stoch RSI code

smoothK = input.int(3, 'K', minval=1)
smoothD = input.int(3, 'D', minval=1)
lengthRSI = input.int(14, 'RSI Length', minval=1)
lengthStoch = input.int(14, 'Stochastic Length', minval=1)

rsi1 = ta.rsi(src, lengthRSI)
k = ta.sma(ta.stoch(rsi1, rsi1, rsi1, lengthStoch), smoothK)
d = ta.sma(k, smoothD)

bandno0 = input.int(80, minval=1, title='Upper Band', group='Bands (change this instead of length in Style for Stoch RSI colour to work properly)')
bandno2 = input.int(50, minval=1, title='Middle Band', group='Bands (change this instead of length in Style for Stoch RSI colour to work properly)')
bandno1 = input.int(20, minval=1, title='Lower Band', group='Bands (change this instead of length in Style for Stoch RSI colour to work properly)')

// Alerts

crossoverAlertBgColourMidOnOff = input.bool(title='Crossover Alert Background Colour (Middle Level) [ON/OFF]', group='Crossover Alerts', defval=false)
crossoverAlertBgColourOBOSOnOff = input.bool(title='Crossover Alert Background Colour (OB/OS Level) [ON/OFF]', group='Crossover Alerts', defval=false)

crossoverAlertBgColourGreaterThanOnOff = input.bool(title='Crossover Alert >input [ON/OFF]', group='Crossover Alerts', defval=false)
crossoverAlertBgColourLessThanOnOff = input.bool(title='Crossover Alert <input [ON/OFF]', group='Crossover Alerts', defval=false)

maTypeChoice = input.string('EMA', title='MA Type', group='Moving Average', options=['EMA', 'WMA', 'SMA', 'None'])
maSrc = input.source(close, title='MA Source', group='Moving Average')
maLen = input.int(200, minval=1, title='MA Length', group='Moving Average')

maValue = if maTypeChoice == 'EMA'
    ta.ema(maSrc, maLen)
else if maTypeChoice == 'WMA'
    ta.wma(maSrc, maLen)
else if maTypeChoice == 'SMA'
    ta.sma(maSrc, maLen)
else
    0

crossupCHECK = maTypeChoice == 'None' or open > maValue and maTypeChoice != 'None'
crossdownCHECK = maTypeChoice == 'None' or open < maValue and maTypeChoice != 'None'

crossupalert = crossupCHECK and ta.crossover(k, d) and (k < bandno2 or d < bandno2)
crossdownalert = crossdownCHECK and ta.crossunder(k, d) and (k > bandno2 or d > bandno2)
crossupOSalert = crossupCHECK and ta.crossover(k, d) and (k < bandno1 or d < bandno1)
crossdownOBalert = crossdownCHECK and ta.crossunder(k, d) and (k > bandno0 or d > bandno0)

aboveBandalert = ta.crossunder(k, bandno0)
belowBandalert = ta.crossover(k, bandno1)

bgcolor(color=crossupalert and crossoverAlertBgColourMidOnOff ? #4CAF50 : crossdownalert and crossoverAlertBgColourMidOnOff ? #FF0000 : na, title='Crossover Alert Background Colour (Middle Level)', transp=70)
bgcolor(color=crossupOSalert and crossoverAlertBgColourOBOSOnOff ? #fbc02d : crossdownOBalert and crossoverAlertBgColourOBOSOnOff ? #000000 : na, title='Crossover Alert Background Colour (OB/OS Level)', transp=70)

bgcolor(color=aboveBandalert and crossoverAlertBgColourGreaterThanOnOff ? #ff0014 : crossdownalert and crossoverAlertBgColourMidOnOff ? #FF0000 : na, title='Crossover Alert - K > Upper level', transp=70)
bgcolor(color=belowBandalert and crossoverAlertBgColourLessThanOnOff ? #4CAF50 : crossdownalert and crossoverAlertBgColourMidOnOff ? #FF0000 : na, title='Crossover Alert - K < Lower level', transp=70)

alertcondition(crossupalert or crossdownalert, title='Stoch RSI Crossover', message='STOCH RSI CROSSOVER')

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