Dual Moving Average and Bollinger Band Combination Trend Tracking Strategy

Overview

This strategy combines dual moving averages, relative strength index (RSI) and Bollinger bands and other technical indicators to build buy and sell signals for the purpose of identifying potential trend reversal points and overbought/oversold conditions to track price trends for trading.

Strategy Principle

The main buy signals of this strategy come from RSI and Bollinger bands. When RSI is below the oversold line of 30, it is viewed as oversold. At this time, if the price approaches or touches the lower rail of the Bollinger bands, a buy signal is generated. This indicates the price may reverse upward.

The main sell signals also come from RSI and Bollinger bands. When RSI exceeds the overbought line of 70, it is viewed as overbought. At this time, if the price approaches or exceeds the upper rail of the Bollinger bands, a sell signal is generated. This indicates the price may reverse downward.

In addition, the strategy calculates the 20-day and 50-day simple moving averages. They can be used to judge the trend direction. When the fast moving average is above the slow moving average, it indicates an upward trend; otherwise, it indicates a downward trend.

Advantage Analysis

This strategy combines multiple indicators to identify buy and sell points, which can effectively capture price trend reversals and track price changes. Its main advantages are:

1. Use Bollinger bands to identify overbought/oversold zones. Bollinger bands define price fluctuation ranges well through standard deviation and can identify abnormal price situations.

2. The RSI indicator can effectively identify overbought/oversold status. RSI above 70 is viewed as overbought zone and below 30 as oversold zone, which can signal ahead of price reversal.

3. The dual moving averages determine the overall trend direction to avoid trading in market without a trend.

4. By combining multiple indicators, false signals can be filtered and high probability buy/sell points can be identified.

Risk Analysis

The main risks of this strategy are:

1. Improper Bollinger band parameter settings may fail to effectively define the price fluctuation range. This may generate a lot of false signals.

2. Different RSI parameters lead to different overbought/oversold criteria and signal generation effects.

3. Different dual moving average parameters lead to bias in judging the overall trend.

4. Strategy signals may lag and fail to give guidance at the very beginning of price reversal. This may lead to certain amount of slippage loss.

5. When the market fluctuates violently, multiple indicators may fail and become ineffective in identifying buy/sell points.

To address the above risks, methods like parameter tuning, combining more indicators can be adopted to optimize the strategy for more robustness.

Optimization Directions

The strategy can be optimized in the following aspects:

1. Use adaptive Bollinger bands to dynamically adjust parameters based on market volatility to make the upper/lower rails more accurate.

2. Add VOLUME and other indicators for filtration, only generating signals when trading volume amplifies, in order to avoid false breakout.

3. Set price stop loss line and stop loss in time when price runs in unfavorable direction.

4. Conduct tests and optimizations towards trading products, trading sessions etc, so that strategy parameters can be adjusted accordingly.

5. Increase machine learning algorithms, automatically optimizing parameter settings through training over historical data.

Conclusion

This strategy integrates Bollinger bands, RSI, dual moving averages and other indicators to establish complete buy and sell rules, which can effectively identify price trends, judge overbought/oversold zones, and give trading signals ahead of price reversal. Through means like parameter optimization, adding filtering conditions, setting stop loss etc, the strategy’s stability can be further improved. In general, by combining trend and overbought/oversold indicators, this strategy can capture reversal opportunities and is worth further optimizations and verifications in live trading.