Developing a 2/20 Exponential Moving Average Strategy

Overview

This strategy utilizes a dual exponential moving average to determine the direction of the trend based on the price breaking through the moving average. It goes long when the price rises above the moving average and goes short when the price falls below the moving average. The strategy combines trend determination and overbought/oversold levels to lock in profits.

Strategy Logic

The strategy is based on the dual exponential moving average indicator. The Length parameter in the indicator sets the moving average period to 20 days. The xPrice parameter is set to the closing price close. The 20-day exponential moving average xXA is then calculated. The highest high nHH and lowest low nLL over the past two days are also calculated. If nLL is higher than the moving average or nHH is lower than the moving average, the smaller of nLL and nHH is taken as the key price nXS. If the closing price is higher than the moving average and the key price, it goes long. If the closing price is lower than the moving average and key price, it goes short. The reverse parameter determines if the trades are reversed.

The strategy judges the direction of the price breaking through the moving average and combines the real-time highest high and lowest low to determine the validity of the breakout to avoid false breakouts. It only sends trade signals when the price actually breaks through the moving average.

Advantage Analysis

1. The dual exponential moving average can more accurately determine the trend direction.

2. Combining the highest high and lowest low to judge the validity of the breakout avoids false breakouts caused by price fluctuations.

3. The long/short direction can be easily reversed using the reverse parameter to adapt to different market environments.

4. Only trading on breakouts effectively filters out market noise.

Risk Analysis

1. The dual exponential moving average sometimes reacts slowly and may miss short-term trading opportunities.

2. Moving average systems are prone to generating frequent false signals during market consolidations.

3. The strategy suits market environments with obvious trends and is unsuitable for range-bound volatile markets.

4. It does not consider stop loss exits and has the risk of enlarging losses.

5. It does not set position sizing and may lead to improper risk control.

Optimization Directions

1. Other indicators can be combined to judge market trends and avoid frequent trading during consolidations.

2. Dynamic stops can be added to control the risk of single trade losses.

3. The moving average parameters can be dynamically adjusted based on market volatility to optimize indicator sensitivity.

4. Position sizing can be set to control risks while expanding profits.

5. Parameters can be optimized using Walk Forward Analysis.

Summary

This strategy utilizes a dual exponential moving average indicator to determine the price trend direction while combining the highest high and lowest low to avoid false breakouts. There is room for improvement in optimizing stop loss mechanisms, controlling position sizing, etc. But overall, the strategy is simple, practical, and adaptable to different market environments through parameter adjustments, making it a reliable trend following strategy.