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Combo Strategy of 123 Reversal and Fractal Chaos Oscillator

Author: ChaoZhang, Date: 2023-11-02 16:43:41
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Overview

This is a combo strategy that combines the 123 Reversal strategy and Fractal Chaos Oscillator strategy to obtain more reliable trading signals.

Strategy Logic

The strategy consists of two parts:

  1. 123 Reversal Strategy

    This strategy is from the book “How I Tripled My Money in The Futures Market” by Ulf Jensen, page 183. It is a reversal type strategy. The logic is:

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

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

  2. Fractal Chaos Oscillator Strategy

    The FCO calculates the difference between the most subtle movements in the market. Its value fluctuates between -1 and 1. The higher the value, the stronger the trend, no matter uptrend or downtrend.

    Go long when FCO reaches a high level. Go short when FCO reaches a low level. This indicator is suitable for intraday trading.

When the signals of both strategies agree, a trade will be made in that direction.

Advantage Analysis

  • Combining reversal and trend strategies helps filter out false signals and improves reliability.

  • The reversal strategy catches short-term reversal opportunities, while the FCO strategy catches mid-long term trends.

  • The optimized Stoch parameters effectively filter out false signals in range-bound markets.

  • The FCO is sensitive to subtle market fluctuations and can early detect trend changes.

Risks and Solutions

  • Reversal strategies can be overwhelmed by huge trend reversions. Adjust parameters or combine with trend strategies.

  • Indicator strategies may generate excessive signals. Adjust parameters or add filtering indicators.

  • Conflicting signals may happen. Optimize parameters based on backtest results to improve cooperation.

  • Add stop loss to control single trade loss.

Optimization Directions

  • Test different reversal parameter combinations to find the optimum.

  • Test different FCO parameters to find the best.

  • Try different parameter optimization methods like genetic algorithms, random forest etc.

  • Add more auxiliary indicators to further filter signals.

  • Add machine learning models to improve signal accuracy.

  • Introduce risk management mechanisms like stop loss, position sizing etc.

Summary

This strategy combines the strengths of reversal and FCO strategies through portfolio usage, and improves signal quality. It shows good performance in backtests. Further optimizations like parameter tuning, adding indicators, risk management etc. can improve its live performance. Overall this is an innovative strategy worth researching and applying.

/*backtest
start: 2023-10-02 00:00:00
end: 2023-10-26 00:00:00
period: 1h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
////////////////////////////////////////////////////////////
//  Copyright by HPotter v1.0 07/10/2020
// This is combo strategies for get a cumulative signal. 
//
// First strategy
// This System was created from the Book "How I Tripled My Money In The 
// Futures Market" by Ulf Jensen, Page 183. This is reverse type of strategies.
// The strategy buys at market, if close price is higher than the previous close 
// during 2 days and the meaning of 9-days Stochastic Slow Oscillator is lower than 50. 
// The strategy sells at market, if close price is lower than the previous close price 
// during 2 days and the meaning of 9-days Stochastic Fast Oscillator is higher than 50.
//
// Second strategy
//   The value of Fractal Chaos Oscillator is calculated as the difference between 
// the most subtle movements of the market. In general, its value moves between 
// -1.000 and 1.000. The higher the value of the Fractal Chaos Oscillator, the 
// more one can say that it follows a certain trend – an increase in prices trend, 
// or a decrease in prices trend.
//
//   Being an indicator expressed in a numeric value, traders say that this is an 
// indicator that puts a value on the trendiness of the markets. When the FCO reaches 
// a high value, they initiate the “buy” operation, contrarily when the FCO reaches a 
// low value, they signal the “sell” action. This is an excellent indicator to use in 
// intra-day trading.
//
// WARNING:
// - For purpose educate only
// - This script to change bars colors.
////////////////////////////////////////////////////////////
Reversal123(Length, KSmoothing, DLength, Level) =>
    vFast = sma(stoch(close, high, low, Length), KSmoothing) 
    vSlow = sma(vFast, DLength)
    pos = 0.0
    pos := iff(close[2] < close[1] and close > close[1] and vFast < vSlow and vFast > Level, 1,
	         iff(close[2] > close[1] and close < close[1] and vFast > vSlow and vFast < Level, -1, nz(pos[1], 0))) 
	pos

fractalUp(pattern) =>
    p = high[pattern+1]
    okl = 1
    okr = 1
    res = 0.0
	for i = pattern to 1
		okl := iff(high[i] < high[i+1] and okl == 1 , 1, 0)
	for i = pattern+2 to pattern*2+1
		okr := iff(high[i] < high[i-1] and okr == 1, 1, 0)
	res := iff(okl == 1 and okr == 1, p, res[1])
    res

fractalDn(pattern) =>
    p = low[pattern+1]
    okl = 1
    okr = 1
    res = 0.0
	for i = pattern to 1
		okl := iff(low[i] > low[i+1] and okl == 1 , 1, 0)
	for i = pattern+2 to pattern*2+1
		okr := iff(low[i] > low[i-1] and okr == 1, 1, 0)
	res := iff(okl == 1 and okr == 1, p, res[1])
    res

FCO(Pattern) =>
    pos = 0.0
    xUpper = fractalUp(Pattern) 
    xLower = fractalDn(Pattern)
    xRes = iff(xUpper != xUpper[1], 1, 
             iff(xLower != xLower[1], -1, 0))
    pos := iff(xRes == 1, 1,
             iff(xRes == -1, -1, nz(pos[1], 0))) 
    pos

strategy(title="Combo Backtest 123 Reversal & Fractal Chaos Oscillator", shorttitle="Combo", overlay = true)
Length = input(15, minval=1)
KSmoothing = input(1, minval=1)
DLength = input(3, minval=1)
Level = input(50, minval=1)
//-------------------------
Pattern = input(1, minval=1)
reverse = input(false, title="Trade reverse")
posReversal123 = Reversal123(Length, KSmoothing, DLength, Level)
posFCO = FCO(Pattern)
pos = iff(posReversal123 == 1 and posFCO == 1 , 1,
	   iff(posReversal123 == -1 and posFCO == -1, -1, 0)) 
possig = iff(reverse and pos == 1, -1,
          iff(reverse and pos == -1 , 1, pos))	   
if (possig == 1) 
    strategy.entry("Long", strategy.long)
if (possig == -1)
    strategy.entry("Short", strategy.short)	 
if (possig == 0) 
    strategy.close_all()
barcolor(possig == -1 ? #b50404: possig == 1 ? #079605 : #0536b3 )
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