Auto S/R Breakout Strategy

Overview

The Auto S/R strategy is a trend following strategy. It calculates the highest and lowest prices over certain periods to determine key support and resistance levels. When the price breaks through these key levels, buy or sell orders are executed.

Strategy Logic

The strategy first computes the highest high and lowest low prices over a number of bars on left and right sides to identify major support and resistance levels. Then it calculates highest high and lowest low prices over a smaller number of bars to determine near-term support and resistance levels. When the price breaks above the near-term support level, a buy order is triggered. When the price breaks below the near-term resistance level, a sell order is triggered.

The key logic behind the strategy is that if the price breaks supporter or resistance levels formed on both sides over certain periods, it likely signals the start of a new trend. Entering positions in the direction of the breakout allows capturing the emerging trend. The strategy combines different timeframes to confirm the trend, avoiding being misled by short-term price swings.

Advantage Analysis

The biggest advantage of this strategy is it can automatically identify key support and resistance levels, eliminating the need for manual price level identification. By combining different timeframes, it can effectively filter out false breakouts, avoiding being trapped in losing positions.

In addition, the entry and exit rules are simple and straight-forward - just requiring a break of the near-term S/R levels. This makes the strategy easy to implement and optimize by tuning parameters.

Risk Analysis

The biggest risk is that automatically calculated S/R levels may not be reliable, and the price could break through without beginning a trend. This could cause losses.

Also, if the period for near-term S/R is too short, it may generate excessive false signals, leading to high losses in live trading.

To reduce risks, consider adding filter conditions using other indicators like volume and moving averages to confirm trend directionality before entries. Traders could also manually inspect and confirm the reasonableness of automatically calculated S/R levels.

Optimization Directions

There are two main aspects this strategy can be optimized:

1. Optimize the input parameters to find the optimal period combinations for highest breakout success rate. Different left and right period mixes could be tested.

2. Add additional filters like volume/momentum indicators and moving averages to avoid false breakouts. Combining with manual inspection of S/R levels could also improve performance.

Summary

Overall this is a solid framework for automatically identifying support and resistance levels. Implementation is straightforward thanks to automated S/R detection, making it suitable for trend following strategies. Further optimizations on parameters and filters can enhance profitability.