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Modified Relative Strength Index Trend Following Strategy

Author: ChaoZhang, Date: 2024-03-29 16:16:37
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Overview

This strategy captures market trends based on the Modified Relative Strength Index (Modified RSI). The main idea of the strategy is to use the crossover signals and histogram signals of the Modified RSI indicator to determine the market trend and make trades according to the trend direction.

Strategy Principle

  1. Calculate the EMA of price as the input for Modified RSI
  2. Calculate the Modified RSI indicator
  3. Calculate the EMA of Modified RSI as the signal line
  4. Calculate the difference between Modified RSI and signal line as the histogram
  5. When Modified RSI crosses above the signal line and the histogram is greater than 0, generate a buy signal
  6. When Modified RSI crosses below the signal line and the histogram is less than 0, generate a sell signal

Strategy Advantages

  1. The Modified RSI indicator can better capture trends compared to the traditional RSI indicator
  2. Combining the crossover signals and histogram signals of Modified RSI can effectively filter out false signals
  3. Parameters are adjustable and applicable to different markets and timeframes
  4. The program is concise and computationally efficient

Strategy Risks

  1. The Modified RSI indicator is prone to generating false signals in range-bound markets
  2. The capture of trend turning points may have a lag
  3. A single indicator is easily affected by price noise

Strategy Optimization Directions

  1. It can be combined with other trend indicators such as moving averages to improve signal reliability
  2. A stop-loss and take-profit module can be added to control single transaction risk
  3. Parameters can be optimized based on different market characteristics
  4. A position management module can be added to dynamically adjust positions

Summary

This strategy utilizes the characteristics of the Modified RSI indicator to build a trading system from the perspective of trend following. The Modified RSI indicator overcomes some of the defects of the traditional RSI indicator and has relatively strong trend capture ability. However, strategies based on a single indicator often have limitations and need to be improved in combination with other technical means. By optimizing strategy parameters, enriching signal sources, adding risk control modules, and other methods, the stability and profitability of this strategy can be further improved.

/*backtest
start: 2023-03-23 00:00:00
end: 2024-03-28 00:00:00
period: 1d
basePeriod: 1h
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/
// © YogirajDange

//@version=5


// Verical lines


// // Define the times
// t1 = timestamp(year, month, dayofmonth, 09, 15) // 9:15
// t2 = timestamp(year, month, dayofmonth, 11, 15) // 11:15
// t3 = timestamp(year, month, dayofmonth, 13, 15) // 1:15
// t4 = timestamp(year, month, dayofmonth, 15, 25) // 3:25

// // Check if the current bar is on the current day
// is_today = (year(time) == year(timenow)) and (month(time) == month(timenow)) and (dayofmonth(time) == dayofmonth(timenow))

// // Draw a vertical line at each time
// if is_today and (time == t1 or time == t2 or time == t3 or time == t4)
//     line.new(x1 = bar_index, y1 = low, x2 = bar_index, y2 = high, extend = extend.both, color=color.red, width = 1)

strategy('Modified RSI')
col_grow_above = input(#02ac11, "Above   Grow", group="Histogram", inline="Above")
col_fall_above = input(#6ee47d, "Fall", group="Histogram", inline="Above")
col_grow_below = input(#e5939b, "Below Grow", group="Histogram", inline="Below")
col_fall_below = input(#dd0000, "Fall", group="Histogram", inline="Below")
EMA_length = input.int(13, 'Price_EMA', minval=1)
RSI_length = input.int(14, 'RSI_Period', minval=1)
Avg_length = input.int(5, 'RSI_Avg_EMA', minval=1)
fastMA = ta.ema(close, EMA_length)
modrsi = ta.rsi(fastMA, RSI_length)
RSIAVG = ta.ema(modrsi, Avg_length)
plot(modrsi, color=color.rgb(38, 0, 255), linewidth=2)
plot(RSIAVG, color=color.rgb(247, 0, 0))
rsiUpperBand = hline(60, 'RSI Upper Band', color=#099b0e)
//hline(50, "RSI Middle Band", color=color.new(#787B86, 50))
rsiLowerBand = hline(40, 'RSI Lower Band', color=#e90101)

RSI_hist = modrsi - RSIAVG

//plot(RSI_hist,"RSI_Histogram", color = #c201e9, style = plot.style_columns,linewidth= 5)

plot(RSI_hist, title="RSI_Histogram", style=plot.style_columns, color=(RSI_hist>=0 ? (RSI_hist[1] < RSI_hist ? col_grow_above : col_fall_above) : (RSI_hist[1] < RSI_hist ? col_grow_below : col_fall_below)))


/////// Moving Averages 20 50 EMA

fast_ma = input.int(20, minval=2, title="Fast_EMA")
slow_ma = input.int(50, minval=2, title="Slow_EMA")

src = input.source(close, title="Source")

out = ta.ema(src, fast_ma)
out1 = ta.ema(src, slow_ma)

//plot(out, title="20 EMA", color=color.rgb(117, 71, 247), linewidth = 2)
//plot(out1, title="50 EMA", color=color.rgb(0, 0, 0), linewidth = 2)


longCondition = ((ta.crossover(modrsi, RSIAVG)) and (RSI_hist > 0))
if longCondition
    strategy.entry('B', strategy.long)

shortCondition = ((ta.crossunder(modrsi, RSIAVG)) and (RSI_hist < 0))
if shortCondition
    strategy.entry('S', strategy.short)
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