Dual Reversal Arbitrage Strategy

Overview

The dual reversal arbitrage strategy is an arbitrage algorithm that integrates dual reversal indicators. It combines the 123 reversal system and the Gann swing oscillator sub-strategies and generates trading signals when both sub-strategies give out signals at the same time to carry out arbitrage operations.

Strategy Logic

The strategy consists of two sub-strategies:

1. 123 Reversal System: It is from the book “How I Tripled My Money in The Futures Market” by Ulf Jensen, Page 183. Its trading rules are: when the closing price is higher than the previous closing price and lower than the closing price 2 days ago, go long when the slow K line is below 50; when the closing price is lower than the previous closing price and higher than the closing price 2 days ago, go short when the fast K line is above 50.

2. Gann Swing Oscillator: It is adapted from Robert Krausz’s book “A W.D. Gann Treasure Discovered”. It judges the direction of market swings by calculating the rise and fall of the highest and lowest prices over a certain period.

The trading logic of this arbitrage strategy is: when the signal directions of the two sub-strategies are consistent, actual trading signals are generated. The long signal is when both sub-strategies give out long signals at the same time; the short signal is when both sub-strategies give out short signals at the same time.

Advantage Analysis

The biggest advantage of this strategy is that by integrating the signals of the two sub-strategies, it can effectively filter out false signals and improve the accuracy of trading signals. The two sub-strategies each have their own strengths. The 123 reversal system can capture sudden reversal trends, while the Gann swing oscillator can determine the maturity of trend reversals. Combining the two can make trading signals more reliable, thereby enhancing the stability of the strategy.

Risk Analysis

The main risk of this strategy is that the probability of inconsistent trading signal directions from the two sub-strategies is relatively large, which may lead to insufficient trading signals. In addition, the sub-strategies themselves also have certain risks of false signals. The combination of these two factors may lead to insufficient number of trades for the strategy, thus unable to fully capture market opportunities.

To mitigate risks, parameters of the sub-strategies can be adjusted to moderately increase trading frequency, or other indicators can be combined to assist in filtering out false signals. When there is a large deviation in signals between the two sub-strategies, following only the more reliable one can also be considered.

Optimization Directions

The strategy can be optimized in the following aspects:

1. Adjust the parameters of the sub-strategies to optimize trading frequency;
2. Add judgements of other technical indicators to improve signal quality;
3. Optimize the weights of the sub-strategies based on different products and timeframes;
4. Add stop loss mechanisms to control single transaction loss.

Summary

The dual reversal arbitrage strategy forms relatively strong trading signals by integrating two different types of reversal strategies. It can effectively filter out noise and improve signal quality, suitable for capturing reversal opportunities in the market. However, the probability of inconsistent signals from the sub-strategies is relatively large, which may lead to insufficient trading frequency. In addition, the parameter settings of combination strategies themselves are quite complex, requiring sufficient testing and optimization in order to achieve the best results.