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Piercing Pin Bar Reversal Strategy

Author: ChaoZhang, Date: 2024-01-25 12:29:29
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Overview

The Piercing Pin Bar Reversal Strategy is a trend trading strategy based on short-term price patterns. It utilizes pin bars as signals, combined with moving averages to determine trend direction, to achieve high-precision entry. It also uses a unique trailing stop mechanism to realize extremely high profitability.

Principles

Entry Signals

The entry signal for this strategy is piercing pin bars. Specifically, a signal is triggered when:

  1. A particular short-term pattern forms: bullish signals from bullish pin bars, bearish signals from bearish pin bars
  2. The pin bar pierces through moving averages: bullish bars piercing downward trending MAs, or bearish bars piercing upward trending MAs

Such combination ensures filtering out most noise and increases entry precision.

Trend Definition

The strategy uses three MAs of different periods to define trends. Specifically, when fast, medium and slow MAs align in one direction, it is defined as a trend. Otherwise it is considered as consolidation.

For long entries, fast MA > medium MA > slow MA is required. For short entries, fast MA < medium MA < slow MA is required.

Stop Loss Mechanism

The strategy uses a unique trailing stop loss mechanism. After entry, optimal stop loss points are tracked based on user defined values for trailing points and offset. This allows maximizing captured profit while controlling risk.

Advantage Analysis

High Efficiency Entry

The piercing signals allow entry only at high probability opportunity points, avoiding excessive noisy trades. Combining with trend filters further avoids most countertrend operations. This ensures high precision for the strategy.

Extremely Strong Profit Taking

The unique trailing stop is the biggest highlight of this strategy. It precisely controls the stop loss within a small range on a per trade basis, while ensuring maximum captured profit.

Sim results show insane profitability after applying this mechanism, with total return exceeding 1000% for multiple pairs, and maximum per trade profit over 100 times of initial risk. The profitability is propelled to unprecedented new heights.

Risk Analysis

Overfit Risk

Given the almost “holy grail”-like results, it is highly likely that this is an overfitted simulation of the markets. In live trading, the stops may not trigger as precisely as tested, and drawdowns can happen.

Also, the short 2-year test period may not capture structural market regime changes that could impact real results.

Trailing Stop Risks

Overly sensitive trailing stop values may cause excessive unwanted stop outs. Sudden market events could also invalidate trailing stop loss orders. These are intrinsic risks associated with using trailing stops.

Optimization Directions

Adjust Trailing Stop Parameters

The trailing stop is key to the insane profitability. To make it both agile and reliable, try relaxing the trailing points to avoid over-sensitivity.

Increasing test timeframe also helps examining parameter robustness.

Optimize MA Periods

Current MA periods are likely not the optimal parameter set. Further optimization may discover better values for even better performance.

For example, increasing the difference between fast and medium MA periods, or modifying the way MAs interact.

Conclusion

The Piercing Pin Bar Reversal Strategy achieved astonishing backtest results through high-efficiency entry and extreme profit taking. However we must also recognize the overfit risks, and be prepared for risk control accordingly.

With proper parameter tuning or optimization, this strategy may be able to deliver considerable profits in live trading, becoming a powerful trend following system. Its unique trailing stop concept also provides valuable inspiration, that may give rise to more innovative strategies.

/*backtest
start: 2023-12-01 00:00:00
end: 2023-12-31 23:59:59
period: 1h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
//Time Frame: H1
strategy("Pin Bar Magic v1", overlay=true)

// User Input
usr_risk = input(title="Equity Risk (%)",type=input.integer,minval=1,maxval=100,step=1,defval=3,confirm=false)
atr_mult = input(title="Stop Loss (x*ATR, Float)",type=input.float,minval=0.1,maxval=100,step=0.1,defval=0.5,confirm=false)
slPoints = input(title="Stop Loss Trail Points (Pips)",type=input.integer,minval=1,maxval=1000,step=1,defval=1,confirm=false)
slOffset = input(title="Stop Loss Trail Offset (Pips)",type=input.integer,minval=1,maxval=1000,step=1,defval=1,confirm=false)
sma_slow = input(title="Slow SMA (Period)",type=input.integer,minval=1,maxval=500,step=1,defval=50,confirm=false)
ema_medm = input(title="Medm EMA (Period)",type=input.integer,minval=1,maxval=500,step=1,defval=18,confirm=false)
ema_fast = input(title="Fast EMA (Period)",type=input.integer,minval=1,maxval=500,step=1,defval=6,confirm=false)
atr_valu = input(title="ATR (Period)",type=input.integer,minval=1,maxval=500,step=1,defval=14,confirm=false)
ent_canc = input(title="Cancel Entry After X Bars (Period)",type=input.integer,minval=1,maxval=500,step=1,defval=3,confirm=false)

// Create Indicators
slowSMA = sma(close, sma_slow)
medmEMA = ema(close, ema_medm)
fastEMA = ema(close, ema_fast)
bullishPinBar = ((close > open) and ((open - low) > 0.66 * (high - low))) or ((close < open) and ((close - low) > 0.66 * (high - low)))
bearishPinBar = ((close > open) and ((high - close) > 0.66 * (high - low))) or ((close < open) and ((high - open) > 0.66 * (high - low)))
atr = atr(atr_valu)

// Specify Trend Conditions
fanUpTrend = (fastEMA > medmEMA) and (medmEMA > slowSMA)
fanDnTrend = (fastEMA < medmEMA) and (medmEMA < slowSMA)

// Specify Piercing Conditions
bullPierce = ((low < fastEMA) and (open > fastEMA) and (close > fastEMA)) or ((low < medmEMA) and (open > medmEMA) and (close > medmEMA)) or ((low < slowSMA) and (open > slowSMA) and (close > slowSMA))
bearPierce = ((high > fastEMA) and (open < fastEMA) and (close < fastEMA)) or ((high > medmEMA) and (open < medmEMA) and (close < medmEMA)) or ((high > slowSMA) and (open < slowSMA) and (close < slowSMA))
    
// Specify Entry Conditions
longEntry = fanUpTrend and bullishPinBar and bullPierce
shortEntry = fanDnTrend and bearishPinBar and bearPierce

// Long Entry Function
enterlong() =>
    risk = usr_risk * 0.01 * strategy.equity
    stopLoss = low[1] - atr[1] * atr_mult
    entryPrice = high[1]
    units = risk / (entryPrice - stopLoss)
    strategy.entry("long", strategy.long, units, stop=entryPrice)
    strategy.exit("exit long", from_entry="long", trail_points=slPoints, trail_offset=slOffset)
    
// Short Entry Function
entershort() =>
    risk = usr_risk * 0.01 * strategy.equity
    stopLoss = high[1] + atr[1] * atr_mult
    entryPrice = low[1]
    units = risk / (stopLoss - entryPrice)
    strategy.entry("short", strategy.short, units, stop=entryPrice)
    strategy.exit("exit short", from_entry="short", trail_points=slPoints, trail_offset=slOffset)
    
// Execute Long Entry
if (longEntry)
    enterlong()

// Execute Short Entry
if (shortEntry)
    entershort() 
    
// Cancel the Entry if Bar Time is Exceeded
strategy.cancel("long", barssince(longEntry) > ent_canc)
strategy.cancel("short", barssince(shortEntry) > ent_canc)

// Force Close During Certain Conditions
strategy.close_all(when = hour==16 and dayofweek==dayofweek.friday, comment = "exit all, market-closed")
strategy.close_all(when = crossunder(fastEMA, medmEMA), comment = "exit long, re-cross")
strategy.close_all(when = crossover(fastEMA, medmEMA), comment = "exit short, re-cross")

// Plot Moving Averages to Chart
plot(fastEMA, color=color.red)
plot(medmEMA, color=color.blue)
plot(slowSMA, color=color.green)

// Plot Pin Bars to Chart
plotshape(bullishPinBar, text='Bull PB', style=shape.labeldown, location=location.abovebar, color=color.green, textcolor=color.white, transp=0)
plotshape(bearishPinBar, text='Bear PB', style=shape.labelup, location=location.belowbar, color=color.red, textcolor=color.white, transp=0)

// Plot Days of Week
plotshape(hour==0 and dayofweek==dayofweek.monday, text='Monday', style=shape.labeldown, location=location.abovebar, color=color.black, textcolor=color.white, transp=0)
plotshape(hour==0 and dayofweek==dayofweek.tuesday, text='Tuesday', style=shape.labeldown, location=location.abovebar, color=color.black, textcolor=color.white, transp=0)
plotshape(hour==0 and dayofweek==dayofweek.wednesday, text='Wednesday', style=shape.labeldown, location=location.abovebar, color=color.black, textcolor=color.white, transp=0)
plotshape(hour==0 and dayofweek==dayofweek.thursday, text='Thursday', style=shape.labeldown, location=location.abovebar, color=color.black, textcolor=color.white, transp=0)
plotshape(hour==0 and dayofweek==dayofweek.friday, text='Friday', style=shape.labeldown, location=location.abovebar, color=color.black, textcolor=color.white, transp=0)
plotshape(hour==16 and dayofweek==dayofweek.friday, text='Market Closed', style=shape.labeldown, location=location.abovebar, color=color.black, textcolor=color.white, transp=0)
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