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Bull Flag Breakout Strategy

Author: ChaoZhang, Date: 2024-02-22 16:41:04
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Overview

The bull flag breakout strategy is a technical analysis strategy that identifies bull flag chart patterns and enters at the breakout point, aiming to capture the start of a trend. The strategy uses the Average True Range (ATR) indicator to assist in determining the flag range after a clear flagpole, filtering entry opportunities.

Strategy Logic

The main steps of this strategy are:

  1. Determine the flagpole: Requires new high in price and breakout of ATR channel.
  2. Determine pole height: Measure distance between pole top and previous SMA.
  3. Determine flag range: Flag bottom is 33% of pole height as minimum range.
  4. Identify flag pattern: Judge if last 3 bars all within flag range.
  5. Entry: Go long when flag pattern emerges.
  6. Exit: Close position after fixed 6 bars.

When judging the flagpole and flag, the strategy cleverly uses the ATR indicator to determine significant breakouts and strictly limits the flag height within 33% of the pole height to avoid excessive false signals. In addition, requiring 3 consecutive bars to form the flag improves reliability. Overall, the strategy rules are rigorously designed and has some advantage in capturing early trend breakouts.

Advantage Analysis

The main advantages of this strategy include:

  1. Using flag patterns to determine trend starts is a classic technical analysis method with high success rate.
  2. ATR and strict range limitations avoid lots of false signals and improve entry accuracy.
  3. Fixed 6 bar exit locks in some profits and avoids reversal risks.
  4. Clear rules easy to implement, grasp and follow.
  5. Can find opportunities in various market conditions, flexible.

Risk Analysis

The major risks of this strategy are:

  1. Flags cannot fully determine trends, failures still exist.
  2. 6 bar exit may be premature and exit too early.
  3. Choppy markets can produce false flags easily.
  4. Unable to effectively control single loss amount.

To address the above risks, we can set stop losses, optimize exit mechanisms to lock profits when reaching certain profit ratio. We can also filter with other indicators to avoid false signals in choppy markets.

Optimization Directions

Some directions to optimize the strategy:

  1. Combine indicators like MACD, KD to avoid false signals in choppy markets.
  2. Parameterize ATR multiplier, exit period based on market regime to improve adaptivity.
  3. Set trailing stop loss or consider profit drawdown ratio for dynamic exits.
  4. Try machine learning approaches to find better features determining flag height.
  5. Evaluate actual win rate and profit ratio, dynamically adjust position sizing.

Conclusion

In conclusion, the bull flag breakout strategy utilizes technical pattern to determine trend starts, a rather classical method, and the entry rules are indeed rigorously designed to filter out many false signals. But there is room for improving risk control and exits holistically so that the strategy can operate steadily across different markets after sufficient verification and optimization. It can become a valuable component in a quantitative trading system.

/*backtest
start: 2024-01-22 00:00:00
end: 2024-02-21 00:00:00
period: 1h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

// © smith26
//This strategy enters on a bull flag and closes position 6 bars later.  Average true range is used instead of a moving average.
//The reason for ATR instead of MA is because with volatile securities, the flagpole must stand up a noticable "distance" above the trading range---which you can't determine with a MA alone.
//This is broken up into multiple parts: Defining a flagpole, defining the pole height, and defining the flag, which will be constrained to the top third (33%) of the pole height to be considered a flag.
//@version=4
strategy("Bull Flag v1.00", overlay=true)

ATR = atr(10) //Average True Range over last 10 bars.

upperATR = ohlc4[1] + ATR[1]  //Open + High + Low + Close divided by 4, + prior ATR.  Just used here for visually plotting the ATR upper channel.
lowerATR = ohlc4[1] - ATR[1] //Open + High + Low + Close divided by 4, - prior ATR.  Just used here for visually plotting the ATR lower channel.

//uncomment these two lines to see ATR channels
plot(upperATR, color=color.orange)
plot (lowerATR, color=color.orange)

//Current close higher than previous close, and current close minus current open is greater than 3 times the previous ATR.  "3x ATR" is chosen because any less was not a noticeable distance above the trading range.
flagpole1 = close>close[1] and (close-open) > (ATR[1] * 3)
plotshape(flagpole1, text="flagpole1", style=shape.arrowdown, size=size.huge) //Plots an arrow for flagpole1 for QA testing

//Two consecutive close higer than their previous close, and current close minus PREVIOUS open is greater than 3 times the previous ATR.
flagpole2 = close>close[1] and close[1]>close[2] and (close-open[1]) > (ATR[1] * 3)
plotshape(flagpole2, text="flagpole2", style=shape.arrowdown, size=size.huge, color=color.yellow) //Plots an arrow for flagpole2 for QA testing

//Three consecutive close higer than their previous close, and current close minus open from 2 bars ago is greater than 3 times the previous ATR.
flagpole3 = close>close[1] and close[1]>close[2] and close[2]>close[3] and (close-open[2]) > (ATR[1] * 3)
plotshape(flagpole3, text="flagpole3", style=shape.arrowdown, size=size.huge, color=color.white) //Plots an arrow for flagpole3 for QA testing

//A flagpole can be any of the three definitions of flagpole.
flagpole = flagpole1 or flagpole2 or flagpole3

//This will return the number of bars since "flagpole" was true.  Not being used, but could be useful.
//since_flagpole = barssince(flagpole)

after_pole_1 = flagpole[1] //This marks the bar directly after a flagpole.  
//plotshape(after_pole_1, text="after_pole_1", style=shape.cross, size=size.large, color=color.white) //Plots a cross for after_pole_1 for QA testing
after_pole_2 = flagpole[2] //This marks the bar two bars after a flagpole.  
after_pole_3 = flagpole[3] //This marks the bar three bars after a flagpole.  

//This returns the price at the "top" of the flagpole (using close price) at the most recent occurence, 0.
pole_top = valuewhen(flagpole, close, 0)
//plot(pole_top, trackprice=true)  //plots a horizontal line at the most recent pole_top

//Measures the distance between last pole top and the previous SMA.
pole_height = pole_top - sma(close, 10)[1] 
//plot(pole_height)

//This marks 33% below the pole_top, which will be the lowest point a flag can be.
flag_bottom = pole_top - (.33 * pole_height)
//plot(flag_bottom)

//The first, second, and third bars after the pole are considered part of a flag when open and close are between the pole_top and flag_bottom
flag1 = after_pole_1 and (open >= flag_bottom) and (open <= pole_top) and (close >= flag_bottom) and (close <= pole_top)
//plotshape(flag1, text="flag1", style=shape.flag, size=size.large, color=color.teal)
flag2 = after_pole_2 and (open >= flag_bottom) and (open <= pole_top) and (close >= flag_bottom) and (close <= pole_top)
//plotshape(flag2, text="flag2", style=shape.flag, size=size.large, color=color.teal)
flag3 = after_pole_3 and (open >= flag_bottom) and (open <= pole_top) and (close >= flag_bottom) and (close <= pole_top)
//plotshape(flag3, text="flag3", style=shape.flag, size=size.large, color=color.teal)

//When all three bars after a flagpole are a flag, the criteria are met and we have a "bull_flag"
//Specifically, when current bar is flag3, previous bar is flag2, and 2 bars ago is flag1, we have a bull_flag.
bull_flag = flag3 and flag2[1] and flag1[2]
plotshape(bull_flag, text="bull_flag", style=shape.flag, size=size.large, color=color.white) //Plots a flag for bull_flag for QA testing


if (bull_flag)
    strategy.entry("Long", strategy.long)

if barssince(bull_flag) == 6 //close 6 bars after entry.
    strategy.close("Long")
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