Dual Exponential Moving Average Trend Following Strategy
Author: ChaoZhang, Date: 2024-02-02 17:11:29Tags:
Overview
The Dual Exponential Moving Average Trend Following Strategy is a trend following strategy based on exponential moving average (EMA) crossovers. It judges the current trend direction by calculating fast EMA line and slow EMA line and acts on their crossovers. When the fast EMA line crosses above the slow EMA line, it is determined as a bullish signal. When the fast EMA line crosses below the slow EMA line, it is determined as a bearish signal. Based on the identified trend direction, this strategy can go long or go short accordingly.
Strategy Logic
The core logic of this strategy lies in calculating two EMA lines of different periods - one acts as the bearish line and one acts as the bullish line. Specifically, the strategy calculates an 8-period fast EMA line using talib indicator as the bullish line. And it calculates a 21-period slow EMA line as the bearish line. Then it judges the crossover relationships between the fast EMA line and slow EMA line. When fast line crosses above slow line, it determines a bullish signal to go long. When fast line crosses below slow line, it determines a bearish signal to go short.
In terms of actual trade execution, this strategy can go long only, go short only, or go both ways when crossover happens between fast and slow lines. Also, stop loss and take profit prices are configured in the strategy. After opening positions, if price goes in unfavorable direction, stop loss will be triggered to exit positions. If price reaches the expected target level, take profit will realize and close positions.
Advantage Analysis
The biggest advantage of the Dual EMA Trend Following strategy lies in the powerful trend identification capability of moving average crossovers. As a common tool for trend analysis, EMA lines can identify trend shifts and turning points through crossovers, avoiding being misled by market noises in short term and catching the main trend direction.
Also, the flexible settings on trade directions make the strategy adaptable to both one-way trends and two-way oscillations, thus enhances the strategy’s applicability. The configured stop loss and take profit controls risk and locks in partial profit.
Risk Analysis
The biggest risk of this strategy is the false signals triggered by frequent small crossovers under range-bound markets. This would lead to excessive position opening and losses. To tackle this, we can increase EMA periods to reduce crossover times and false signal probabilities.
On the other hand, a too tight stop loss setting also increases the chance of getting stopped out. In this case, we need to expand the stop loss range carefully balancing the risk of being trapped.
Optimization Directions
This strategy can be further optimized in the following aspects:
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Adaptive adjustment on EMA periods based on market volatility and backtest results, avoiding overfitting under fixed periods.
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Adding filter conditions to filter out false signals, e.g. combine with trading volumes to filter insignificant crossovers; or combine other indicators like MACD and KDJ to avoid signals in uncertainty.
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Optimizing stop loss and take profit strategies, e.g. combining ATR to realize dynamic trailing on SL/TP, preventing over-tight SL and premature TP.
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Testing different holding periods. Too long holding periods can be impacted by incidents, while too short periods lead to high trading costs and slippage costs. Finding the optimum holding days can improve strategy profitability.
Summary
In general, the Dual EMA Trend Following Strategy is a robust and practical trend trading system. It catches trend directions effectively through EMA crossover system. Meanwhile, the flexible settings on trade directions make it adaptable; the configured stop loss and take profit control risks. With further optimizations and enhancements, this strategy can become a powerful tool for quantitative trading.
/*backtest
start: 2024-01-02 00:00:00
end: 2024-02-01 00:00:00
period: 2h
basePeriod: 15m
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/
// © TradersPostInc
//@version=5
strategy('TradersPost Example MOMO Strategy', overlay=true, default_qty_value=100, initial_capital=100000, default_qty_type=strategy.percent_of_equity, pyramiding=0)
startTime = input(defval = timestamp('01 Jan 2021 00:00 +0000'), title = 'Start Time', group = 'Date Range')
endTime = input(defval = timestamp('31 Dec 2023 23:59 +0000'), title = 'End Time', group = 'Date Range')
timeCondition = true
timeConditionEnd = timeCondition[1] and not timeCondition
fastEmaLength = input.int(defval = 8, title = 'Fast EMA Length')
slowEmaLength = input.int(defval = 21, title = 'Slow EMA Length')
sides = input.string(defval = 'Both', title = 'Sides', options = ['Long', 'Short', 'Both', 'None'])
fastEma = ta.ema(close, fastEmaLength)
slowEma = ta.ema(close, slowEmaLength)
isUptrend = fastEma >= slowEma
isDowntrend = fastEma <= slowEma
trendChanging = ta.cross(fastEma, slowEma)
ema105 = request.security(syminfo.tickerid, '30', ta.ema(close, 105)[1], barmerge.gaps_off, barmerge.lookahead_on)
ema205 = request.security(syminfo.tickerid, '30', ta.ema(close, 20)[1], barmerge.gaps_off, barmerge.lookahead_on)
plot(ema105, linewidth=4, color=color.new(color.purple, 0), editable=true)
plot(ema205, linewidth=2, color=color.new(color.purple, 0), editable=true)
aa = plot(fastEma, linewidth=3, color=color.new(color.green, 0), editable=true)
bb = plot(slowEma, linewidth=3, color=color.new(color.red, 0), editable=true)
fill(aa, bb, color=isUptrend ? color.green : color.red, transp=90)
tradersPostBuy = trendChanging and isUptrend and timeCondition
tradersPostSell = trendChanging and isDowntrend and timeCondition
pips = syminfo.pointvalue / syminfo.mintick
percentOrPipsInput = input.string('Percent', title='Percent or Pips', options=['Percent', 'Pips'])
stopLossLongInput = input.float(defval=0, step=0.01, title='Stop Loss Long', minval=0)
stopLossShortInput = input.float(defval=0, step=0.01, title='Stop Loss Short', minval=0)
takeProfitLongInput = input.float(defval=0, step=0.01, title='Target Profit Long', minval=0)
takeProfitShortInput = input.float(defval=0, step=0.01, title='Target Profit Short', minval=0)
stopLossPriceLong = ta.valuewhen(tradersPostBuy, close, 0) * (stopLossLongInput / 100) * pips
stopLossPriceShort = ta.valuewhen(tradersPostSell, close, 0) * (stopLossShortInput / 100) * pips
takeProfitPriceLong = ta.valuewhen(tradersPostBuy, close, 0) * (takeProfitLongInput / 100) * pips
takeProfitPriceShort = ta.valuewhen(tradersPostSell, close, 0) * (takeProfitShortInput / 100) * pips
takeProfitALong = takeProfitLongInput > 0 ? takeProfitLongInput : na
takeProfitBLong = takeProfitPriceLong > 0 ? takeProfitPriceLong : na
takeProfitAShort = takeProfitShortInput > 0 ? takeProfitShortInput : na
takeProfitBShort = takeProfitPriceShort > 0 ? takeProfitPriceShort : na
stopLossALong = stopLossLongInput > 0 ? stopLossLongInput : na
stopLossBLong = stopLossPriceLong > 0 ? stopLossPriceLong : na
stopLossAShort = stopLossShortInput > 0 ? stopLossShortInput : na
stopLossBShort = stopLossPriceShort > 0 ? stopLossPriceShort : na
takeProfitLong = percentOrPipsInput == 'Pips' ? takeProfitALong : takeProfitBLong
stopLossLong = percentOrPipsInput == 'Pips' ? stopLossALong : stopLossBLong
takeProfitShort = percentOrPipsInput == 'Pips' ? takeProfitAShort : takeProfitBShort
stopLossShort = percentOrPipsInput == 'Pips' ? stopLossAShort : stopLossBShort
buyAlertMessage = '{"ticker": "' + syminfo.ticker + '", "action": "buy", "price": ' + str.tostring(close) + '}'
sellAlertMessage = '{"ticker": "' + syminfo.ticker + '", "action": "sell", "price": ' + str.tostring(close) + '}'
exitLongAlertMessage = '{"ticker": "' + syminfo.ticker + '", "action": "exit", "price": ' + str.tostring(close) + '}'
exitShortAlertMessage = '{"ticker": "' + syminfo.ticker + '", "action": "exit", "price": ' + str.tostring(close) + '}'
if (sides != "None")
if tradersPostBuy
strategy.entry('Long', strategy.long, when = sides != 'Short', alert_message = buyAlertMessage)
strategy.close('Short', when = sides == "Short" and timeCondition, alert_message = exitShortAlertMessage)
if tradersPostSell
strategy.entry('Short', strategy.short, when = sides != 'Long', alert_message = sellAlertMessage)
strategy.close('Long', when = sides == 'Long', alert_message = exitLongAlertMessage)
exitAlertMessage = '{"ticker": "' + syminfo.ticker + '", "action": "exit"}'
strategy.exit('Exit Long', from_entry = "Long", profit = takeProfitLong, loss = stopLossLong, alert_message = exitAlertMessage)
strategy.exit('Exit Short', from_entry = "Short", profit = takeProfitShort, loss = stopLossShort, alert_message = exitAlertMessage)
strategy.close_all(when = timeConditionEnd)
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