SMA-ATR Dynamic Trailing Stop Strategy

Overview

This strategy is a long-term trading strategy that sets dynamic trailing stop loss based on Simple Moving Average (SMA) and Average True Range (ATR). It combines the advantages of trend tracking and risk management to control drawdowns while maximizing profits.

Strategy Logic

Enter long when the closing price crosses above SMA 200 plus ATR 14, close the position when the closing price crosses below SMA 200 minus ATR 14. The strategy uses SMA 200 to determine the major trend direction, and sets the stop loss line dynamically with ATR 14, realizing dynamic trailing stop loss. Specifically, the buy signal is triggered when the closing price breaks through SMA 200 plus ATR 14. This breakout means the current market stays in upward trend. The stop loss signal is triggered when the closing price breaks through SMA 200 minus ATR 14. This breakout means the upward trend is broken.

Advantage Analysis

This strategy combines the advantages of both SMA and ATR indicators. SMA 200 filters market noise and locks in primary trend direction. ATR 14 sets stop loss line based on the volatility of recent two weeks, realizing dynamic trailing stop loss function. This achieves sustained profitability within the trend, while also controlling drawdowns effectively. The overall advantages are:

1. Higher profit/loss ratio. Following trends and controlling risks leads to higher profit/loss ratio.

2. Controllable drawdowns. The dynamic stop loss with ATR reduces the impact of sporadic market shocks.

3. Simple parameters. Only two parameters balance risks and returns, avoiding overfitting.

Risk Analysis

Some risks of this strategy should be concerned:

1. Trend reversal risk. The strategy itself cannot identify trend reversal, which may lead to huge losses if sudden trend turning appears.

2. SMA lagging risk. SMA has some lagging effect which cannot reflect trend change instantly.

3. ATR parameter risk. Improper ATR parameter setting can influence strategy performance.

Solutions:

1. Add other indicators to determine trend reversal, e.g. MACD.
2. Test different parameter combinations to find the optimal balance.

Optimization Directions

This strategy can be further optimized from the following aspects:

1. Test different combinations of SMA and ATR parameters to find the optimal one.

2. Add more technical indicators to judge reversal, e.g. MACD.

3. Optimize the stop loss mechanism with trailing stop loss, moving stop loss etc.

4. Combine fundamental factors to avoid buying up stocks with weak fundamentals.

Conclusion

This strategy integrates trend tracking and dynamic risk management methods to optimize stop loss and take profit during long holding periods. It features high profit/loss ratio, controllable drawdowns and balanced risk/return profile. But it also has some trend reversal risks and difficulty in parameter optimization. Overall, this simple and effective strategy provides a long-term trading idea worthy of further testing and optimization for quantitative trading.