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Stochastic and Moving Average Crossover Trend Following Quantitative Strategy

Author: ChaoZhang, Date: 2024-02-05 15:27:03
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Overview

This strategy mainly utilizes the crosses of the Stoch indicator in the overbought/oversold area as entry signals, while judging the current trend direction with the EMA indicator. It only goes long in an uptrend determined by EMA and goes short in a downtrend, which is a typical trend following strategy.

Principles

The strategy consists of three main parts:

  1. EMA to determine the trend direction

    Using one fast and one slow EMA, when the fast EMA is above the slow EMA, it is determined as an upward trend. When the fast EMA is below the slow EMA, it is determined as a downward trend.

  2. Stoch to generate trading signals

    The Stoch indicator consists of %K and %D lines. When %K crosses above %D in the overbought area, it generates a buy signal. When %K crosses below %D in the oversold area, it generates a sell signal. This strategy only takes Stoch crossover signals when they happen in the overbought/oversold zones.

  3. Risk management mechanism

    The strategy also sets stop loss and take profit levels. When holding a long position, if the price breaks the stop loss level, it will exit the trade. If the price breaks the take profit level, it will close the position for profit. The same logic applies to short positions.

In general, this is a typical quantitative trading strategy that uses a combination of indicators to determine trend direction and trading signals, supplemented by strict risk management rules to reduce trading risk.

Advantage Analysis

The main advantages of this strategy are:

  1. Using EMA to determine the major and minor trends avoids being trapped in a sideways market.

  2. The strength of the Stoch indicator lies in its ability to accurately reflect overbought/oversold levels. Combining this with crossover signals allows overbought/oversold zone trading.

  3. The strategy specifies the possible long and short scenarios clearly, which further filters the signals and avoids blindly opening positions in a complex market.

  4. The strict risk management helps control the loss of individual trades, limits max drawdown while still giving profitable trades room to run.

Risk Analysis

There are also some risks with this strategy:

  1. Indicators like EMA and Stoch have lagging nature, making it hard for this strategy to timely catch market reversals.

  2. Purely relying on indicators can establish bias easily, thus missing trading opportunities actually provided by the market.

  3. The risk management mechanism itself can also limit the profit potential by setting premature stop loss and take profit.

  4. There are risks associated with parameter selection. Extensive backtesting and optimization is needed to find the optimal parameters.

Optimization Directions

The strategy can be optimized in the following aspects:

  1. Try different types of EMA for trend determination, like WMA, Hull MA etc and compare results.

  2. Combine other indicators to generate trading signals, e.g. MACD, KDJ to build a multi-indicator system.

  3. Optimize stop loss and take profit settings to better adapt to market volatility. Can set wider stop loss and tighter take profit.

  4. Test performance variance across different products and time frames to find optimal combination.

  5. Consider introducing machine learning models to aid trend and signal judgment to make the strategy more intelligent.

Conclusion

In conclusion, this strategy combines commonly used indicators to form a relatively mature trend following system, taking into account trend determination, trading signals, and risk management. With further optimization, I believe this strategy can achieve better live trading results. At the same time, we should also be aware of limitations of single strategies and continue to learn market intricacies in pursuit of long-term steady profits.

/*backtest
start: 2024-01-05 00:00:00
end: 2024-02-04 00:00:00
period: 1h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=2
//by Wugamlo
//Strategy combining Stochastic Crosses in the Overbought/Oversold Area with a trend determined by two EMAs
//Default setup seems to work best on 4HR timeframe for BTC 

strategy(title = "Strategy Stoch/EMA Cross", shorttitle = "Strategy Stoch/EMA Cross", overlay = true, pyramiding = 0, default_qty_type = strategy.percent_of_equity, default_qty_value = 100, currency = currency.USD, commission_value=0.01,commission_type=strategy.commission.percent, initial_capital=1000)

// === GENERAL INPUTS ===
SectionInd      = input(defval = true ,title = "════════════ INDICATORS ════════════")
maFastLength    = input(defval = 55,   title = "Fast MA Period", minval = 1)
maSlowLength    = input(defval = 89,   title = "Slow MA Period", minval = 1)
StochLength     = input(defval = 14,   title = "Stochastic Length", minval=1)
smoothK         = input(defval = 6,    title = "%K Smooth", minval=1)
smoothD         = input(defval = 3,    title = "%D Smooth", minval=1)
overbought      = 80
oversold        = 20
HighlightOBOS   = input(defval = true, title = "Highlight Stoch Cross?")
HighlightTrend  = input(defval = true, title = "Highlight Trend?")

//DATE AND TIME
SectionFrom     = input(defval = true ,title = "═══════════════ FROM ═══════════════")
fromDay         = input(defval = 01,   title = "From day", minval=1)
fromMonth       = input(defval = 1,    title = "From month", minval=1)
fromYear        = input(defval = 2019, title = "From year", minval=2014)
SectionTo       = input(defval = true, title = "════════════════ TO ════════════════")
toDay           = input(defval = 31,   title = "To day", minval=1)
toMonth         = input(defval = 12,    title = "To month", minval=1)
toYear          = input(defval = 2020, title = "To year", minval=2014)

// === STRATEGY RELATED INPUTS ===
SectionStra     = input(defval = true ,title = "═════════════ STRATEGY ═════════════")

// Include Shorts or only trade Long Positions?
includeShorts   = input(defval = true, title = "Include Short Positions?")


// Risk Management inputs
useTakeProfit   = input(defval = true,  title = "User Take Profit?")
inpTakeProfit   = input(defval = 8,     title = "Take Profit (%)", minval = 0)
useStopLoss     = input(defval = false, title = "User Stop Loss?")
inpStopLoss     = input(defval = 2,     title = "Stop Loss (%)", minval = 0)

StopLossPerc    = inpStopLoss * 0.01
TakeProfitPerc  = inpTakeProfit * 0.01


// === EMA SERIES SETUP ===
maFast = ema(close, maFastLength)
maSlow = ema(close, maSlowLength)
diff   = maFast - maSlow

// === STOCHASTIC SETUP ===
k      = sma(stoch(close, high, low, StochLength), smoothK)
d      = sma(k, smoothD)

// Stochastic Long/Short Entry determination
stochLong  = crossover(k,d)  and (k < oversold)
stochShort = crossunder(k,d) and (k > overbought)

// Stochastic Long/Short Exit determination
stochLongEx  = crossover (k, overbought)
stochShortEx = crossunder(k, oversold)


// === PLOTTING EMAs ===
fast = plot(maFast, title = "Fast MA", color = yellow, linewidth = 1, style = line, transp = 10)
slow = plot(maSlow, title = "Slow MA", color = white,  linewidth = 1, style = line, transp = 10)


// === Vertical Coloring for Crosses in Overbought/Oversold zone and for MA Trend Zones ===
b_color = stochLong ? green : stochShort ? red : na
bgcolor(HighlightOBOS ? b_color : na, title="Overbought / Oversold", transp=65)   //Highlight the Overbought/Oversold Stoch Crossings
t_color = diff>=0 ? green : diff<0 ? red : na
bgcolor(HighlightTrend ? t_color : na, title="Trend up / Trend down", transp=75)  //Highlight the EMA Trend


// === STRATEGY LOGIC ===
// Time Restriction
timeInRange = true


// === STRATEGY - LONG POSITION EXECUTION ===
if stochLong and (diff >=0) and timeInRange    //Open Long when Stoch crossing in Oversold area and EMATrend is up
    strategy.entry(id = "Long", long = true)
if stochLong and (diff <0) and timeInRange     //Close Long when another Long Stoch cross signal is given after Trend has changed to down (avoid fake signals)
    strategy.close(id = "Long")
if stochLongEx and timeInRange                 //Close Long when Stoch is getting Overbought 
    strategy.close(id = "Long")


// === STRATEGY - SHORT POSITION EXECUTION ===
if stochShort and (diff <0) and timeInRange and includeShorts  //Open Short when Stoch crossing in Overbought area and EMA Trend is down
    strategy.entry(id = "Short", long = false)
if stochShort and (diff >=0) and timeInRange                   //Close Short when another Short Stoch cross signal is given after Trend has changed to up (avoid fake signals)
    strategy.close(id = "Short")
if stochShortEx and timeInRange                                //Close Short when Stoch is getting Oversold 
    strategy.close(id = "Short")

        
// === STRATEGY RISK MANAGEMENT EXECUTION ===
//Stop Loss
if useStopLoss    //Exit when Stop Loss is hit
    strategy.exit("Exit Long SL",   from_entry = "Long",  loss = close * StopLossPerc / syminfo.mintick )
    strategy.exit("Exit Short SL",  from_entry = "Short", loss = close * StopLossPerc / syminfo.mintick )

//Take Profit
if useTakeProfit  //Exit when Take Profit Limit is hit
    strategy.exit("Exit Long TP",   from_entry = "Long",  profit = close * TakeProfitPerc / syminfo.mintick)
    strategy.exit("Exit Short TP",  from_entry = "Short", profit = close * TakeProfitPerc / syminfo.mintick)
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