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Quantitative Trading Strategy Integrating Reversal and Future Lines of Demarcation

Author: ChaoZhang, Date: 2023-12-08 12:00:35
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Overview

This strategy integrates the 123 reversal strategy and future lines of demarcation (FLD) strategy to implement a quantitative trading strategy that enters or exits positions when both strategies generate signals simultaneously. It is mainly applied to index futures markets, capturing opportunities from combinations of short-term reversal signals and medium-long term trend signals for medium-short term holding trades.

Principles

123 Reversal Strategy

The 123 reversal strategy originates from the book “How I Tripled My Money in the Futures Market”. It goes long when the closing price shows reversal patterns for two continuous days and the 9-day slow stochastics is below 50; It goes short when the closing price shows reversal patterns for two continuous days and the 9-day fast stochastics is above 50.

Future Lines of Demarcation Strategy

The future lines of demarcation (FLD) strategy is a trend-following strategy based on the periodicity of price fluctuations. FLD lines are plotted by shifting the median, high or low prices approximately half a cycle into the future. Trading signals are generated when prices cross the FLD lines.

Advantage Analysis

This strategy combines reversal and trend-following strategies, capturing both short-term reversal opportunities and medium-long term trend directions on multiple time frames for quantitative trading. The reversal element provides short-term profit-taking chances while the trend-following part ensures the overall trading aligns with the trend, effectively controlling trading risks. Moreover, the adaptive nature of FLD also enhances the stability of the strategy.

Risk Analysis

The main risks of this strategy come from false breakouts of reversal signals and errors in FLD line judgments. For the former, parameters can be adjusted to confirm reversal signals or add other auxiliary indicators to improve accuracy. For the latter, parameters need to be optimized to ensure FLD describes market cycles more precisely. Additionally, mistakes of FLD when major trend reversals occur should also be watched out for.

Optimization Directions

  1. Improve reversal strategy by adding other indicators to filter signals and decrease false breakout possibilities
  2. Compare different FLD parameters to better describe cyclical patterns
  3. Add stop loss logic to control single loss risks
  4. Test parameter effectiveness across different products

Conclusion

This strategy combines reversal and trend-following concepts for stable profits over medium-short term time frames. Future optimizations in aspects of signal accuracy, trend description capability and risk control will expand its parameter universe and improve stability.

/*backtest
start: 2022-12-01 00:00:00
end: 2023-12-07 00:00:00
period: 1d
basePeriod: 1h
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
////////////////////////////////////////////////////////////
//  Copyright by HPotter v1.0 28/08/2020
// 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
//  An FLD is a line that is plotted on the same scale as the price and is in fact the 
//  price itself displaced to the right (into the future) by (approximately) half the 
//  wavelength of the cycle for which the FLD is plotted. There are three FLD's that can be 
//  plotted for each cycle:
//    An FLD based on the median price.
//    An FLD based on the high price.
//    An FLD based on the low price.
//
// 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


FLD(Period,src) =>
    pos = 0
    pos := iff(src[Period] < close , 1,
             iff(src[Period] > close, -1, nz(pos[1], 0))) 
    pos

strategy(title="Combo Backtest 123 Reversal & FLD's - Future Lines of Demarcation", shorttitle="Combo", overlay = true)
Length = input(15, minval=1)
KSmoothing = input(1, minval=1)
DLength = input(3, minval=1)
Level = input(50, minval=1)
//-------------------------
Period = input(title="Period", defval=40)
src = input(title="Source", type=input.source, defval=close)
reverse = input(false, title="Trade reverse")
posReversal123 = Reversal123(Length, KSmoothing, DLength, Level)
posFLD = FLD(Period,src)
pos = iff(posReversal123 == 1 and posFLD == 1 , 1,
	   iff(posReversal123 == -1 and posFLD == -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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