Overview

The Momentum Reversal trading strategy combines the advantages of reversal and momentum strategies by utilizing signals from both types of indicators to take counter-directional trades at turning points for profit.

Strategy Logic

The strategy consists of two parts:

The first part is the 123 reversal strategy. Its logic is:

• Go long when the close price is higher than the previous close for 2 consecutive days and the 9-day slow Stochastic Oscillator is below 50.

• Go short when the close price is lower than the previous close for 2 consecutive days and the 9-day fast Stochastic Oscillator is above 50.

The second part is the filtered momentum indicator. Its calculation steps are:

1. Calculate price change xMom = close - close[1]

2. Calculate absolute price change xMomAbs = abs(close - close[1])

3. Filter xMom if less than threshold Filter to 0

4. Filter xMomAbs if less than threshold Filter to 0

5. Calculate sum of filtered xMom over n days nSum

6. Calculate sum of filtered xMomAbs over n days nAbsSum

7. Calculate momentum value: nRes = 100 * nSum / nAbsSum

8. Generate signal based on nRes and bands TopBand, LowBand

This indicator filters out small fluctuations and extracts momentum information from major trends.

Finally, trading signals are generated when the signals from both indicators align for long or short.

Advantage Analysis

The strategy combines the advantages of two different types of indicators to improve signal quality:

1. The 123 reversal strategy catches reversal trends at turning points, avoiding being trapped.

2. The filtered momentum indicator focuses on large moves only, filtering out noise and catching major trends.

3. Combining them verifies signals and reduces incorrect trades, improving win rate.

Risk Analysis

The main risks of this strategy include:

1. Single timeframe analysis may miss larger trend.

2. Static parameter settings cannot adapt to market changes.

3. Double verification may miss some opportunities, reducing profit potential.

4. Low quality signals may also be verified, leading to losses.

Optimization Directions

The strategy can be optimized in several aspects:

1. Add multi-timeframe verification to avoid being trapped.

2. Use adaptive parameters to adjust indicators based on market conditions.

3. Optimize filter threshold to reduce false signals.

4. Add stop loss to control single trade loss amount.

5. Adjust position sizing to optimize capital utilization efficiency.

Conclusion

In conclusion, the Momentum Reversal strategy combines the strengths of reversal and filtered momentum strategies to improve signal quality and profitability to some extent. However, it also has some flaws like ignoring larger trends, static parameters, false signals etc. Methods like multi-timeframe validation, adaptive parameters, stop loss can optimize the strategy by reducing risks and improving steady profitability.