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Trend Following Strategy Based on RSI and Weighted Moving Average

Author: ChaoZhang, Date: 2023-12-25 13:28:24
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Overview

This strategy is based on two well-known indicators: Relative Strength Index (RSI) and Weighted Moving Average (WMA). It identifies market trend and follows its direction. RSI judges overbought/oversold levels, WMA determines price trend. The combination of both can filter out irrelevant signals effectively and improve profitability. This is a medium/long-term strategy, coupled with money management method to adjust position size based on gain/loss.

Strategy Logic

RSI Indicator

RSI is one of the best-known overbought/oversold indicators. Its formula is:

$$RSI = 100 - \frac{100}{1+\frac{AvgGain}{AvgLoss}}$$

Where AvgGain is the average of days that close is above open over past x days, AvgLoss is the average of absolute value of days that close is below open over past x days.

This strategy sets RSI period as 20 to judge the trend. RSI above 60 generates long signal, RSI below 40 generates short signal.

Weighted Moving Average (WMA)

Compared with SMA, WMA weights recent prices more heavily. Its formula is:

$$WMA = \frac{\sum_{i=1}^n w_i x_i}{\sum_{i=1}^n w_i}$$

Where w is the weight, w grows exponentially with increasing i. This strategy uses following weight formula:

$$w = \begin{cases} 100/(4+(n-4)1.3), & i <= 3 \ 1.3w, & i > 3 \end{cases}$$

Namely the weight is equal in last 3 days, and grows 1.3 times every 1 day backward. This highlights influence of recent prices.

The WMA length in this strategy is 20.

Strategy Signals

Long signal: RSI > 60 and 20-day ROC of WMA < -1 Short signal: RSI < 40 and 20-day ROC of WMA > 1

Where 20-day ROC of WMA is calculated as:

$$ROC = (WMA_{today}/WMA_{20_days_ago} - 1) \times 100$$

Advantages

  • Use RSI to determine trend direction, avoid losing money in whipsaw markets
  • WMA weights recent prices to reduce noise and identify major trend
  • Combination of RSI and WMA ROC filters out irrelevant signals
  • Multiple ATR trailing take-profit, flexible profit-taking
  • Money management adjusts position size based on gain/loss, controls risk

Risks

  • Improper parameter settings may increase trading frequency
  • Improper stop loss setting may expand losses
  • As trend following strategy, not suitable for range-bound market
  • Pay attention to macro environment changes, manual intervention if necessary

Improvement Directions

  • Test RSI length, WMA length, ROC threshold to find optimum parameter set
  • Test different money management methods to find best position adjustment plan
  • Add other indicators for further signal filtering
  • Incorporate stop loss strategy to limit per trade loss risk
  • Optimize take profit strategy to maximize profit during trend

Conclusion

This strategy combines RSI and WMA to determine trend direction, aiming to profit from major trend over medium/long term. Money management and profit taking strategies also used to control risks. It has practical value but parameter settings and stop loss mechanism need continuous testing and optimization for better results. Investors should assess situation, intervene manually if necessary, and ensure controllable risks.

/*backtest
start: 2022-12-24 00:00:00
end: 2023-12-06 05:20:00
period: 1d
basePeriod: 1h
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

// This source code is subject to the terms of the Mozilla Public License 2.0 at https://mozilla.org/MPL/2.0/
// © gsanson66


//This code is based on RSI and a backed weighted MA
//@version=5
strategy("RSI + MA BACKTESTING", overlay=true, initial_capital=1000, default_qty_type=strategy.fixed, commission_type=strategy.commission.percent, commission_value=0.18, slippage=3)


//------------------------TOOL TIPS---------------------------//

t1 = "Choice between a Standard MA (SMA) or a backed-weighted MA (RWMA) which permits to minimize the impact of short term reversal. Default is RWMA."
t2 = "Value of RSI to send a LONG or a SHORT signal. RSI above 60 is a LONG signal and RSI below 40 is a SHORT signal."
t3 = "Rate of Change Value of selected MA to send a LONG or a SHORT signal. By default : ROC MA below -1 is a LONG signal and ROC MA above 1 is a SHORT signal"
t4 = "Threshold value to trigger trailing Take Profit. This threshold is calculated as a multiple of the ATR (Average True Range)."
t5 = "Percentage value of trailing Take Profit. This Trailing TP follows the profit if it increases, remaining selected percentage below it, but stops if the profit decreases."
t6 = "Each gain or losse (relative to the previous reference) in an amount equal to this fixed ratio will change quantity of orders."
t7 = "The amount of money to be added to or subtracted from orders once the fixed ratio has been reached."


//------------------------FUNCTIONS---------------------------//

//@function which calculate a retro weighted moving average to minimize the impact of short term reversal
rwma(source, length) =>
    sum = 0.0
    denominator = 0.0
    weight = 0.0
    weight_x = 100/(4+(length-4)*1.30)
    weight_y = 1.30*weight_x
    for i=0 to length - 1
        if i <= 3
            weight := weight_x
        else
            weight := weight_y
        sum := sum + source[i] * weight
        denominator := denominator + weight
    rwma = sum/denominator

//@function which permits the user to choose a moving average type
ma(source, length, type) =>
    switch type
        "SMA" => ta.sma(source, length)
        "RWMA" => rwma(source, length)

//@function Displays text passed to `txt` when called.
debugLabel(txt, color) =>
    label.new(bar_index, high, text = txt, color=color, style = label.style_label_lower_right, textcolor = color.black, size = size.small)

//@function which looks if the close date of the current bar falls inside the date range
inBacktestPeriod(start, end) => (time >= start) and (time <= end)


//--------------------------------USER INPUTS-------------------------------//

//Technical parameters
rsiLengthInput = input.int(20, minval=1, title="RSI Length", group="RSI Settings")
maTypeInput = input.string("RWMA", title="MA Type", options=["SMA", "RWMA"], group="MA Settings", inline="1", tooltip=t1)
maLenghtInput = input.int(20, minval=1, title="MA Length", group="MA Settings", inline="1")
rsiLongSignalValue = input.int(60, minval=1, maxval=99, title="RSI Long Signal", group="Strategy parameters", inline="3")
rsiShortSignalValue = input.int(40, minval=1, maxval=99, title="RSI Short Signal", group="Strategy parameters", inline="3", tooltip=t2)
rocMovAverLongSignalValue = input.float(-1, maxval=0, title="ROC MA Long Signal", group="Strategy parameters", inline="4")
rocMovAverShortSignalValue = input.float(1, minval=0, title="ROC MA Short Signal", group="Strategy parameters", inline="4", tooltip=t3)
//TP Activation and Trailing TP
takeProfitActivationInput = input.float(5, minval=1.0, title="TP activation in multiple of ATR", group="Strategy parameters", tooltip=t4)
trailingStopInput = input.float(3, minval=0, title="Trailing TP in percentage", group="Strategy parameters", tooltip=t5)
//Money Management
fixedRatio = input.int(defval=400, minval=1, title="Fixed Ratio Value ($)", group="Money Management", tooltip=t6)
increasingOrderAmount = input.int(defval=200, minval=1, title="Increasing Order Amount ($)", group="Money Management", tooltip=t7)
//Backtesting period
startDate = input(title="Start Date", defval=timestamp("1 Jan 2018 00:00:00"), group="Backtesting Period")
endDate = input(title="End Date", defval=timestamp("1 July 2024 00:00:00"), group="Backtesting Period")


//------------------------------VARIABLES INITIALISATION-----------------------------//

float rsi = ta.rsi(close, rsiLengthInput)
float ma = ma(close, maLenghtInput, maTypeInput)
float roc_ma = ((ma/ma[maLenghtInput]) - 1)*100
float atr = ta.atr(20)
var float trailingStopOffset = na
var float trailingStopActivation = na
var float trailingStop = na
var float stopLoss = na
var bool long = na
var bool short = na
var bool bufferTrailingStopDrawing = na
float theoreticalStopPrice = na
bool inRange = na
equity = math.abs(strategy.equity - strategy.openprofit)
strategy.initial_capital = 50000
var float capital_ref = strategy.initial_capital
var float cashOrder = strategy.initial_capital * 0.95


//------------------------------CHECKING SOME CONDITIONS ON EACH SCRIPT EXECUTION-------------------------------//

//Checking if the date belong to the range
inRange := true

//Checking performances of the strategy
if equity > capital_ref + fixedRatio
    spread = (equity - capital_ref)/fixedRatio
    nb_level = int(spread)
    increasingOrder = nb_level * increasingOrderAmount
    cashOrder := cashOrder + increasingOrder
    capital_ref := capital_ref + nb_level*fixedRatio
if equity < capital_ref - fixedRatio
    spread = (capital_ref - equity)/fixedRatio
    nb_level = int(spread)
    decreasingOrder = nb_level * increasingOrderAmount
    cashOrder := cashOrder - decreasingOrder
    capital_ref := capital_ref - nb_level*fixedRatio

//Checking if we close all trades in case where we exit the backtesting period
if strategy.position_size!=0 and not inRange
    debugLabel("END OF BACKTESTING PERIOD : we close the trade", color=color.rgb(116, 116, 116))
    strategy.close_all()
    bufferTrailingStopDrawing := false
    stopLoss := na
    trailingStopActivation := na
    trailingStop := na
    short := false
    long := false


//------------------------------STOP LOSS AND TRAILING STOP ACTIVATION----------------------------//

// We handle the stop loss and trailing stop activation 
if (low <= stopLoss or high >= trailingStopActivation) and long
    if high >= trailingStopActivation
        bufferTrailingStopDrawing := true
    else if low <= stopLoss
        long := false
    stopLoss := na
    trailingStopActivation := na
if (low <= trailingStopActivation or high >= stopLoss) and short
    if low <= trailingStopActivation
        bufferTrailingStopDrawing := true
    else if high >= stopLoss
        short := false
    stopLoss := na
    trailingStopActivation := na


//-------------------------------------TRAILING STOP--------------------------------------//

// If the traling stop is activated, we manage its plotting with the bufferTrailingStopDrawing
if bufferTrailingStopDrawing and long
    theoreticalStopPrice := high - trailingStopOffset * syminfo.mintick
    if na(trailingStop)
        trailingStop := theoreticalStopPrice
    else if theoreticalStopPrice > trailingStop
        trailingStop := theoreticalStopPrice
    else if low <= trailingStop
        trailingStop := na
        bufferTrailingStopDrawing := false
        long := false
if bufferTrailingStopDrawing and short
    theoreticalStopPrice := low + trailingStopOffset * syminfo.mintick
    if na(trailingStop)
        trailingStop := theoreticalStopPrice
    else if theoreticalStopPrice < trailingStop
        trailingStop := theoreticalStopPrice
    else if high >= trailingStop
        trailingStop := na
        bufferTrailingStopDrawing := false
        short := false


//---------------------------------LONG CONDITION--------------------------//

if rsi >= 60 and roc_ma <= rocMovAverLongSignalValue and inRange and not long
    if short
        bufferTrailingStopDrawing := false
        stopLoss := na
        trailingStopActivation := na
        trailingStop := na
        short := false
    trailingStopActivation := close + takeProfitActivationInput*atr
    trailingStopOffset := (trailingStopActivation * trailingStopInput/100) / syminfo.mintick
    stopLoss := close - 3*atr
    long := true
    qty = cashOrder/close
    strategy.entry("Long", strategy.long, qty)
    strategy.exit("Exit Long", "Long", stop = stopLoss, trail_price = trailingStopActivation,
                 trail_offset = trailingStopOffset)


//--------------------------------SHORT CONDITION-------------------------------//

if rsi <= 40 and roc_ma >= rocMovAverShortSignalValue and inRange and not short
    if long
        bufferTrailingStopDrawing := false
        stopLoss := na
        trailingStopActivation := na
        trailingStop := na
        long := false
    trailingStopActivation := close - takeProfitActivationInput*atr
    trailingStopOffset := (trailingStopActivation * trailingStopInput/100) / syminfo.mintick
    stopLoss := close + 3*atr
    short := true
    qty = cashOrder/close
    strategy.entry("Short", strategy.short, qty)
    strategy.exit("Exit Short", "Short", stop = stopLoss, trail_price = trailingStopActivation,
                 trail_offset = trailingStopOffset)


//--------------------------------PLOTTING ELEMENT---------------------------------//

// Plotting of element in the graph
plotchar(rsi, "RSI", "", location.top, color.rgb(0, 214, 243))
plot(ma, "MA", color.rgb(219, 219, 18))
plotchar(roc_ma, "ROC MA", "", location.top, color=color.orange)
// Visualizer trailing stop and stop loss movement
plot(stopLoss, "SL", color.red, 3, plot.style_linebr)
plot(trailingStopActivation, "Trigger Trail", color.green, 3, plot.style_linebr)
plot(trailingStop, "Trailing Stop",  color.blue, 3, plot.style_linebr)
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