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Reversal Candlestick Backtesting Strategy

Author: ChaoZhang, Date: 2024-01-26 16:04:26
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Overview

This strategy identifies candlestick patterns to track trading signals and incorporates take profit and stop loss logic for automated trading. It goes long or short when reversal patterns are identified and closes positions when take profit or stop loss is triggered.

Strategy Logic

  1. Identify candlestick patterns: When candle body size is smaller than threshold and open equals close, it is identified as tracking signal.

  2. Long/short: When reversal candlestick pattern identified, go long if previous close higher than 2 days ago, go short if previous close lower than 2 days ago.

  3. Take profit/Stop loss: When price reaches entry price + take profit points when long, take profit; When price reaches entry price - take profit points when short, take profit; When price triggers stop loss point after long/short, stop loss.

Advantages

  1. Candlestick reversal patterns effectively capture turning points of price, enhancing validity of trading signals.

  2. Take profit/Stop loss mechanism effectively controls risks, locks in profits, avoids enlarging losses.

  3. Automated trading without manual intervention reduces trading costs and improves efficiency.

Risks

  1. Subjectivity in candlestick pattern identification may lead to misjudgements.

  2. Improper take profit/stop loss point settings may miss larger trends or stop loss prematurely.

  3. Strategy parameters need constant testing and optimization, otherwise overfitting.

Optimization Directions

  1. Optimize candlestick identification conditions with more indicators to improve accuracy.

  2. Test on different trading instruments, adjust take profit/stop loss points, optimize parameters.

  3. Enrich strategy logic by adding algorithms to identify more trading signals.

  4. Add position sizing module to dynamically adjust positions based on reference indicators.

Conclusion

This strategy identifies reversal signals through candlestick patterns and sets take profit/stop loss rules for automated trading. The strategy is simple and practical to a certain extent. But there is room for improvement in terms of identification accuracy and parameter optimization. Further testing and optimization are recommended before applying in live trading.

/*backtest
start: 2023-12-26 00:00:00
end: 2024-01-25 00:00:00
period: 1h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=3
////////////////////////////////////////////////////////////
//  Copyright by HPotter v1.0 30/01/2019
//   This is a candlestick where the open and close are the same. 
// WARNING:
// - For purpose educate only
// - This script to change bars colors.
////////////////////////////////////////////////////////////
strategy(title = "Doji Backtest", overlay = true)
input_takeprofit = input(10, title="Take Profit pip", step=0.01)
input_stoploss = input(10, title="Stop Loss pip", step=0.01)
input_minsizebody = input(0.5, title="Min. Size Body pip", step=0.01)
barcolor(abs(close - open) <= input_minsizebody ? open == close ? yellow : na : na)
possell = 0.0
posbuy = 0.0
pospricebuy = 0.0
pospricesell = 0.0
barcolornow = blue
pospricesell := close< close[2] ? abs(close - open) <= input_minsizebody ? open == close ? close : nz(pospricesell[1], 0) : nz(pospricesell[1], 0) : nz(pospricesell[1], 0) 
possell := iff(pospricesell > 0 , -1, 0)
barcolornow := possell == -1 ? red: posbuy == 1 ? green : blue 
pospricesell := iff(low <= pospricesell - input_takeprofit and pospricesell > 0, 0 ,  nz(pospricesell, 0))
pospricesell := iff(high >= pospricesell + input_stoploss and pospricesell > 0, 0 ,  nz(pospricesell, 0))
pospricebuy := close > close[2] ? abs(close - open) <= input_minsizebody ? open == close ? close : nz(pospricebuy[1], 0) : nz(pospricebuy[1], 0) : nz(pospricebuy[1], 0) 
posbuy := iff(pospricebuy > 0 , 1, 0)
barcolornow := posbuy == 1 ? green: barcolornow
pospricebuy := iff(high >= pospricebuy + input_takeprofit and pospricebuy > 0, 0 ,  nz(pospricebuy, 0))
pospricebuy := iff(low <= pospricebuy - input_stoploss and pospricebuy > 0, 0 ,  nz(pospricebuy, 0))
barcolor(barcolornow)
if (posbuy == 0 and possell == 0) 
    strategy.close_all()
if (posbuy == 1)
    strategy.entry("Long", strategy.long)
if (possell == -1)
    strategy.entry("Short", strategy.short)	   	    
pospricebuy := iff(high <= pospricebuy + input_takeprofit and pospricebuy > 0, 0 ,  nz(pospricebuy, 0))
pospricebuy := iff(low >= pospricebuy - input_stoploss and pospricebuy > 0, 0 ,  nz(pospricebuy, 0))
pospricesell := iff(low <= pospricesell - input_takeprofit and pospricesell > 0, 0 ,  nz(pospricesell, 0))
pospricesell := iff(high >= pospricesell + input_stoploss and pospricesell > 0, 0 ,  nz(pospricesell, 0))
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