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Divergence Matrix Trend Following Strategy

Author: ChaoZhang, Date: 2023-12-12 17:05:27
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Overview

The Divergence Matrix Trend Following Strategy is a quantitative trading strategy that combines trend, divergence, and moving average analysis. This strategy uses dual RSI indicators to judge market trend direction and matrix moving averages to generate entry signals. The matrix moving averages adjust position sizing based on the degree of price divergence. Overall, the advantage of this strategy is to confirm trading signals with multiple indicators, which can effectively avoid false breakouts. Meanwhile, the matrix mechanism can lock in higher returns.

Strategy Logic

The Divergence Matrix Trend Following Strategy consists of the following main parts:

  1. Dual RSI for trend judging

    Use fast RSI and slow RSI to determine market trend direction. When the fast RSI shows overbought or oversold levels, check the slow RSI for trend direction.

  2. Matrix moving average for trading signals

    Set up a group of matrix moving averages based on the entry price. When the price touches a moving average line, adjust the position accordingly. This allows more profits to be captured in trends.

  3. Bi-directional trading

    Default is bi-directional trading. Can choose to only go long.

The specific trading logic is:

  1. Use fast RSI to spot temporary overbought/oversold levels in the market.

  2. Use slow RSI to determine the mid-to-long term trend direction of the market.

  3. When fast RSI shows extremes and slow RSI signals trend reversal, take positions based on the long/short trend by slow RSI.

  4. After entering positions, set up a group of matrix moving averages. These matrix lines are based around the entry price, with interval size defined in the “Matrix Interval %” parameter.

  5. When price touches a matrix line, adjust position size accordingly. For example, increase longs on upward breakouts, reduce shorts on downward breakdowns.

  6. When price sees large adjustments, positions will be reset to initial levels.

The above describes the main trading logic of this strategy. The matrix mechanism allows more trend profits to be locked in.

Advantages

The Divergence Matrix Trend Following Strategy has the following advantages:

  1. Dual RSI signals are more reliable. Fast RSI avoids false breakouts and slow RSI ensures the major trend is correct.

  2. Matrix moving averages profit from trends. Adjusting position size based on price divergence allows sustained profits to be captured.

  3. Supports bi-directional trading. Default is dual directional trading, but can also go long only. This adapts to more market environments.

  4. Position reset mechanism controls risks. Resetting positions when price sees large adjustments allows timely stop losses.

  5. Flexible parameter settings. Users can select optimal parameter combinations based on historical data, trading instruments etc.

  6. Clean code structure. Clear separation of responsibilities makes the code easy to understand, optimize and extend.

In summary, the biggest edge of this strategy is to improve signal quality through multiple mechanisms while pursuing higher returns under controlled risks. This is a strategy balancing risk and reward.

Risks

The Divergence Matrix Trend Following Strategy also has some risks, mainly in the following areas:

  1. Failure risk of dual RSI signals. When the market is range-bound, RSI often gives false signals. Manual intervention is needed to adjust parameters or suspend trading.

  2. Improper matrix moving average risk. If matrix parameters are not set properly, position adjustments can be too aggressive, thus magnifying losses. Conservative parameter testing is a must.

  3. Risk of over-leveraged positions. Excessive position size adjustments will also expand losses. The maximum position size parameter needs to be set prudently.

  4. Trend reversal risk. If failing to close positions promptly when trend reverses, large losses may be incurred. This calls for monitoring longer-term trend indicators.

  5. Limited optimization space risk. This strategy is already quite mature. Continued optimization potential is limited. Major upgrades may be needed if market regimes change drastically.

Assessing and optimizing the strategy is key to mitigating these risks - adjusting parameters, monitoring longer-term indicators etc, can alleviate risks to some extent.

Enhancement Opportunities

There is room for further enhancement of the Divergence Matrix Trend Following Strategy:

  1. Optimize dual RSI parameters. Test more parameter combinations and select RSI periods with highest accuracy.

  2. Customizable matrix lines. Allow users to parameterize matrix settings based on different instruments to better suit their characteristics.

  3. Add stop loss mechanisms. For example, set up exit lines to stop out positions if price breaks those lines.

  4. Add more scientific position sizing rules. Manage position size adjustments in a more gradual fashion to prevent over-leveraging.

  5. Incorporate other indicators. Introduce additional indicators like MACD, KD etc. to improve signal accuracy.

  6. Optimize code structure. Further improve extensibility, maintainability and execution efficiency of the code.

Conclusion

The Divergence Matrix Trend Following Strategy is a sophisticated quantitative trading strategy combining multiple mechanisms - using dual RSI for trend direction and matrix lines to profit from trends. Compared to single-indicator strategies, it provides more stable and efficient trading signals. With parameter tuning and optimization extensions, this strategy can adapt to more market conditions and regimes, making it highly versatile. Overall, this strategy strikes a good balance between risk and return, and deserves active application and continued enhancement by investors.

/*backtest
start: 2023-01-01 00:00:00
end: 2023-10-14 00:00:00
period: 1d
basePeriod: 1h
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=3
strategy("The Matrix 7.0 Strategy", overlay=false)

//Matrix Settings 
entry_size = input(title="Entry Size", defval = 1)
max_size = input(title="Max Size", defval = 10000)
matrix = input(title="Matrix Interval %", defval = 2)
matrix_price_overwrite = input(title="Matrix Overwrite $", defval = 0.0)
adjustment = input(title="Adjustment Size", defval = 1000)
trade_short = input(title="Trade Short", type=bool, defval = true)

//RSI Settings
periods = input(title="RSI Periods", defval = 14)
overbought_short = input(title="RSI Overbought", defval = 65)
oversold_short = input(title="RSI Oversold", defval = 30)

//RSI Trend Settings
resolution_long = input(title="Resolution Trend", defval = "D")
periods_long = input(title="RSI Trend Periods", defval = 14)
overbought_long = input(title="RSI Trend Overbought", defval = 64)
oversold_long = input(title="RSI Trend Oversold", defval = 30)

//Round Off to 2 decimals
round2(x) =>
    a = x * 10 * 10
    a := floor(a + 0.5)
    a := a / 10 / 10
    a

//RSI Function
RSI = rsi(close, periods)

//RSI Market Function
rsi_oversold = RSI < oversold_short
rsi_overbought = RSI > overbought_short

market_rsi = 0.0
market_rsi := if (rsi_oversold)
    RSI - oversold_short
else
    if (rsi_overbought)
        RSI - overbought_short
    else
        0

//RSI Trend Function
rsi_long = request.security(syminfo.tickerid,resolution_long,rsi(close,periods_long))
trend_rsi_long = rsi_long < oversold_long
trend_rsi_short = rsi_long > overbought_long
trend_rsi = 0
trend_rsi := if (trend_rsi_short)
    -1
else
    if (trend_rsi_long)
        1
    else
        trend_rsi[1] 

// // Shorter time resolution to make "close" crosses give faster positives.
// short_resolution = security(tickerid, "1", close)
// quick = round2(short_resolution) //ROUND OFF TO 2 DECIMAL PLACES.

//Declare Other Variables
entry_price = 0.0
entry_price := nz(entry_price[1])

position_size = 0.0
position_size := nz(position_size[1])

last_traded_price = 0.0
last_traded_price := nz(last_traded_price[1])


matrix_price = 0.0
if matrix_price_overwrite > 0.0
    matrix_price := matrix_price_overwrite
else
    matrix_price := round2((matrix/100) * entry_price)

level = 0
level := nz(level[1])

level_price = entry_price
if not na(level_price[1])
    level_price := level_price[1]

// Calculate Level
if close > level_price 
    level_change = floor((high - level_price)/matrix_price)
    level := level + level_change
else
    if close < level_price 
        level_change = ceil((low - level_price)/matrix_price)
        level := level + level_change
        
// Calculate Level Price   
level_price := (level * matrix_price) + entry_price

// Calculate Matrix Position
matrix_position = 0.0

if position_size > 0
    matrix_position :=  ((-1 * level) * adjustment) + entry_size
else
    if position_size < 0
        matrix_position :=  ((-1 * level) * adjustment) - entry_size
    
//Trend Entry or Reversal Conditions
trend_reversal_up = trend_rsi == 1 and (trend_rsi[1] == -1 or trend_rsi == 0) and position_size <= 0
trend_reversal_down = trend_rsi == -1 and (trend_rsi[1] == 1 or trend_rsi == 0) and position_size >= 0 and trade_short == true
flatten_position = trend_rsi == -1 and (trend_rsi[1] == 1 or trend_rsi == 0) and position_size >= 0 and trade_short == false

//Reset Conditions
reset_long = (position_size > 0) and (close - entry_price > matrix_price) and (market_rsi < 0) and (position_size != entry_size) 
reset_short = (position_size < 0) and (entry_price - close > matrix_price) and (market_rsi > 0) and (position_size != (-1 * entry_size)) 

//Adjustment Conditions
increase_long = (position_size > 0) and (matrix_position > position_size) and (market_rsi < 0) and (matrix_position <= max_size) 
decrease_long = (position_size > 0) and (matrix_position < position_size) and (market_rsi > 0) 
increase_short = (position_size < 0) and (matrix_position < position_size) and (market_rsi > 0) and (matrix_position >= (-1 * max_size)) 
decrease_short = (position_size < 0) and (matrix_position > position_size) and (market_rsi < 0)  

//Transactions
//Trend Reversals
if trend_reversal_up
    strategy.entry("OL", strategy.long, qty=entry_size)
    position_size := entry_size
    matrix_position := entry_size
    level := 0
else
    if trend_reversal_down 
        strategy.entry("OS", strategy.short, qty=entry_size)
        position_size := -1 * entry_size
        matrix_position := -1 * entry_size   
        level := 0
        
    //Reset Positions    
    else
        if reset_long
            order = entry_size - position_size[1]
            strategy.order("RL", strategy.long, qty=order)
            position_size := entry_size
            matrix_position := entry_size
            level := 0
        else
            if reset_short
                order = position_size[1] - (-1* entry_size)
                strategy.order("RS", strategy.short, qty=order)
                position_size := -1 * entry_size
                matrix_position := -1 * entry_size
                level := 0

    //Position Adjustments
            else    
                if increase_long
                    order = matrix_position - position_size[1]
                    strategy.order("IL", strategy.long, qty=order)
                    position_size := position_size[1] + order
                else
                    if decrease_long
                        order = position_size[1] - matrix_position
                        strategy.order("DL", strategy.short, qty=order)
                        position_size := position_size[1] - order
                    else
                        if increase_short
                            order = position_size[1] - matrix_position
                            strategy.order("IS", strategy.short, qty=order)
                            position_size := position_size[1] - order
                        else
                            if decrease_short
                                order = matrix_position - position_size[1]
                                strategy.order("DS", strategy.long, qty=order)
                                position_size := position_size[1] + order
                            else 
                                if flatten_position
                                    strategy.close_all()
                                    position_size := 0.0
                                    matrix_position := 0.0
                                    level := 0

//Grouped Actions
if trend_reversal_up or trend_reversal_down or reset_short or reset_long
    entry_price := round2(close)
    last_traded_price := round2(close)

if increase_long or decrease_long or increase_short or decrease_short
    last_traded_price := round2(close)

// //RSI Trend & Adjustment Moments. (strategy)
p1 = plot(market_rsi, color = trend_rsi > 0 ? green : red, linewidth = 4, title='Market', transp =0)
p2 = plot(trend_rsi, color = trend_rsi > 0 ? green : red, linewidth = 4, title='Trend', transp = 0)
fill(p1,p2, color=trend_rsi > 0 ? green : red, transp=0)
p3 = plot((rsi_long - 50) *2, color = white, title="Trend Index")
fill(p2,p3, color=white)
hline((overbought_long -50) * 2)
hline((oversold_long -50) * 2)

//Position Plots (strategy)
plot(matrix_position / 100, title='Matrix', color=white, linewidth = 4)
plot(position_size / 100, title='Position', color=blue, linewidth = 4)
plot(strategy.position_size / 100, title='Strategy', color=orange, linewidth = 4)

// //Price Plots (study)
// plot(level_price, title="Matrix Level Price", linewidth=4)
// plot(last_traded_price, title="Last Traded Price", linewidth=2, color=orange)
// plot(entry_price + (4 * matrix_price), title='Adjustment 4', color=white, linewidth = 1)
// plot(entry_price + (3 * matrix_price), title='Adjustment 3', color=white, linewidth = 1)
// plot(entry_price + (2 * matrix_price), title='Adjustment 2', color=white, linewidth = 1)
// plot(entry_price + matrix_price, title='Adjustment 1', color=white, linewidth = 1)
// plot(entry_price, title='Entry Price', color=white, linewidth = 3)
// plot(entry_price - matrix_price, title='Adjustment -1', color=white, linewidth = 1)
// plot(entry_price - (2 * matrix_price), title='Adjustment -2', color=white, linewidth = 1)
// plot(entry_price - (3 * matrix_price), title='Adjustment -3', color=white, linewidth = 1)
// plot(entry_price - (4 * matrix_price), title='Adjustment -4', color=white, linewidth = 1)


// //Alerts (study only)
// alertcondition(trend_reversal_up, title='Trend Reversal Up', message='Market Oversold, Lets Buy')
// alertcondition(trend_reversal_down, title='Trend Reversal Down', message='Market Overbought, Lets Sell')
// alertcondition(reset_long, title='Reset Long', message='Higher Bottom, Lets Buy')
// alertcondition(reset_short, title='Reset Short', message='Lower Top, Lets Sell')
// alertcondition(increase_long, title='Increase Long', message='Price Dropped, Lets Buy')
// alertcondition(decrease_long, title='Decrease Long', message='Price Spiked, Lets Sell')
// alertcondition(increase_short, title='Increase Short', message='Price Spiked, Lets Sell')
// alertcondition(decrease_short, title='Decrease Short', message='Price Dropped, Lets Buy')

// //Grouped Conditions
// condition_buy = trend_reversal_up or increase_long or decrease_short or reset_long
// condition_sell = trend_reversal_down or decrease_long or increase_short or reset_short
// adjustment_matrix = trend_reversal_up or increase_long or decrease_short or trend_reversal_down or decrease_long or increase_short or reset_long or reset_short

// //Grouped Alerts
// alertcondition(condition_buy, title='Condition Buy', message='You Need to Buy')
// alertcondition(condition_sell, title='Condition Sell', message='You Need to Sell!')
// alertcondition(adjustment_matrix, title='Adjustment Matrix', message='You Need to Adjust')
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