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Trend Following Trading Strategy Based on T3 Indicator

Author: ChaoZhang, Date: 2024-01-18 16:21:40
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Strategy Overview

This strategy designs a trend following trading system based on the T3 moving average indicator. It can automatically identify the direction of price trends and take corresponding long or short positions. It goes long when prices rise and goes short when prices fall. The system also has the function of reversal trading.

Strategy Logic

The strategy uses the T3 indicator to determine the direction of the price trend. The T3 indicator is an adaptive moving average with higher sensitivity that can respond to price changes faster. Its calculation formula is:

T3(n) = GD(GD(GD(n)))

Where GD represents the generalized DEMA (double exponential moving average), which is calculated as:

GD(n,v) = EMA(n) * (1+v)-EMA(EMA(n)) * v

v is the volume factor, which determines the sensitivity of the moving average’s response to linear price trends. When v=0, GD=EMA; when v=1, GD=DEMA. The author suggests setting v=0.7.

The strategy compares the T3 indicator with the price. When T3 crosses above the price, it determines an upward price trend and goes long. When T3 crosses below the price, it determines a downward price trend and goes short.

Advantages

  • Uses adaptive moving average T3 indicator, sensitive to price trend changes
  • Automatically determines price trend direction, no manual judgment needed
  • Configurable reversal trading, flexible to cope with market changes

Risks

  • T3 indicator may have difficulty determining trend direction during range-bound consolidation
  • Adaptive moving average indicators tend to produce false signals
  • Risk control for reversal trading needs to be cautious

This can be mitigated by adjusting T3 parameters or adding other indicators for filtration, as well as setting stop loss to control single loss.

Optimization Directions

  • Add other indicators for filtration, such as MACD, RSI etc for combination
  • Add trend judgment rules to avoid false operations during sideways markets
  • Optimize parameters, adjust v value for better parameter combination
  • Add stop loss logic

Summary

The strategy automatically determines the price trend direction through the T3 indicator, without the need for manual judgment, and can automatically go long or short. It can also be configured for reversal trading to cope with more complex market situations. There is room for optimizing parameters, trading logic etc. to make the strategy perform even better.

/*backtest
start: 2023-12-18 00:00:00
end: 2024-01-17 00:00:00
period: 1h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=2
////////////////////////////////////////////////////////////
//  Copyright by HPotter v1.00 29/11/2017
// This indicator plots the moving average described in the January, 1998 issue
// of S&C, p.57, "Smoothing Techniques for More Accurate Signals", by Tim Tillson.
// This indicator plots T3 moving average presented in Figure 4 in the article.
// T3 indicator is a moving average which is calculated according to formula:
//     T3(n) = GD(GD(GD(n))),
// where GD - generalized DEMA (Double EMA) and calculating according to this:
//     GD(n,v) = EMA(n) * (1+v)-EMA(EMA(n)) * v,
// where "v" is volume factor, which determines how hot the moving average’s response
// to linear trends will be. The author advises to use v=0.7.
// When v = 0, GD = EMA, and when v = 1, GD = DEMA. In between, GD is a less aggressive
// version of DEMA. By using a value for v less than1, trader cure the multiple DEMA
// overshoot problem but at the cost of accepting some additional phase delay.
// In filter theory terminology, T3 is a six-pole nonlinear Kalman filter. Kalman
// filters are ones that use the error — in this case, (time series - EMA(n)) — 
// to correct themselves. In the realm of technical analysis, these are called adaptive
// moving averages; they track the time series more aggres-sively when it is making large
// moves. Tim Tillson is a software project manager at Hewlett-Packard, with degrees in
// mathematics and computer science. He has privately traded options and equities for 15 years.   
//
// You can change long to short in the Input Settings
// WARNING:
// - For purpose educate only
// - This script to change bars colors.
////////////////////////////////////////////////////////////
strategy(title="T3 Averages", shorttitle="T3", overlay = true)
Length = input(5, minval=1)
b = input(0.7, minval=0.01,step=0.01) 
reverse = input(false, title="Trade reverse")
xPrice = close
xe1 = ema(xPrice, Length)
xe2 = ema(xe1, Length)
xe3 = ema(xe2, Length)
xe4 = ema(xe3, Length)
xe5 = ema(xe4, Length)
xe6 = ema(xe5, Length)
c1 = -b*b*b
c2 = 3*b*b+3*b*b*b
c3 = -6*b*b-3*b-3*b*b*b
c4 = 1+3*b+b*b*b+3*b*b
nT3Average = c1 * xe6 + c2 * xe5 + c3 * xe4 + c4 * xe3
pos = iff(nT3Average > close, -1,
       iff(nT3Average < close, 1, nz(pos[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)	   	    
barcolor(possig == -1 ? red: possig == 1 ? green : blue )  
plot(nT3Average, color=blue, title="T3")
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