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A Dual Reversal Momentum Index Trading Strategy

Author: ChaoZhang, Date: 2024-02-06 09:29:34
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Overview

The Dual Reversal Momentum Index strategy combines a 123 Reversal strategy and a Relative Momentum Index (RMI) strategy. It aims to improve the accuracy of trading decisions by utilizing dual signals.

Strategy Principle

The strategy consists of two parts:

  1. 123 Reversal Strategy

    • Long when yesterday’s close is lower than the previous day’s and today’s close is higher than the previous day’s, and 9-day Slow K is lower than 50
    • Short when yesterday’s close is higher than the previous day’s and today’s close is lower than the previous day’s, and 9-day Fast K is higher than 50

  2. Relative Momentum Index (RMI) Strategy

    • RMI is a variation of RSI with a momentum component added. Its formula is: RMI = (Upward Momentum SMA)/(Downward Momentum SMA)*100
    • Long when RMI is lower than the overbought line; Short when RMI is higher than the oversold line

The strategy only generates trading signals when the 123 Reversal and RMI give aligned dual signals. This can effectively reduce the chance of erroneous trades.

Advantage Analysis

The advantages of this strategy include:

  1. Improved signal accuracy with dual indicators
  2. Reversal techniques suitable for range-bound markets
  3. Sensitive RMI to identify turning points of strong trends

Risk Analysis

There are also some risks:

  1. Dual filters may miss some trading opportunities
  2. Reversal signals could have misjudgments
  3. Improper RMI parameter settings may affect efficiency

These risks could be reduced by adjusting parameters, optimizing indicator calculations.

Optimization Directions

The strategy can be further optimized through:

  1. Testing different parameter combinations to find the optimum
  2. Trying different reversal indicator combinations e.g. KDJ, MACD
  3. Adjusting RMI formula to make it more sensitive
  4. Adding stop loss mechanisms to control single loss
  5. Combining trading volume to avoid false signals

Conclusion

The Dual Reversal Momentum Index strategy can effectively improve the accuracy of trading decisions and reduce the chance of erroneous signals through dual signal filtering and parameter optimization. It is suitable for range-bound markets to uncover reversal opportunities. The strategy can be further enhanced by adjusting parameters and optimizing indicator calculations to lower risks.

/*backtest
start: 2024-01-06 00:00:00
end: 2024-02-05 00:00:00
period: 1h
basePeriod: 15m
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=4
////////////////////////////////////////////////////////////
//  Copyright by HPotter v1.0 07/06/2021
// 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 Relative Momentum Index (RMI) was developed by Roger Altman. Impressed 
// with the Relative Strength Index's sensitivity to the number of look-back 
// periods, yet frustrated with it's inconsistent oscillation between defined 
// overbought and oversold levels, Mr. Altman added a momentum component to the RSI.
// As mentioned, the RMI is a variation of the RSI indicator. Instead of counting 
// up and down days from close to close as the RSI does, the RMI counts up and down 
// days from the close relative to the close x-days ago where x is not necessarily 
// 1 as required by the RSI). So as the name of the indicator reflects, "momentum" is 
// substituted for "strength". 
//
// 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


RMI(Length,BuyZone, SellZone) =>
    pos = 0.0
    xMU = 0.0
    xMD = 0.0
    xPrice = close
    xMom = xPrice - xPrice[Length]
    xMU := iff(xMom >= 0, nz(xMU[1], 1) - (nz(xMU[1],1) / Length) + xMom, nz(xMU[1], 1))
    xMD := iff(xMom <= 0, nz(xMD[1], 1) - (nz(xMD[1],1) / Length) + abs(xMom), nz(xMD[1], 0))
    RM = xMU / xMD
    nRes = 100 * (RM / (1+RM))
    pos:= iff(nRes < BuyZone, 1,
    	   iff(nRes > SellZone, -1, nz(pos[1], 0))) 
    pos

strategy(title="Combo Backtest 123 Reversal & Relative Momentum Index", shorttitle="Combo", overlay = true)
line1 = input(true, "---- 123 Reversal ----")
Length = input(14, minval=1)
KSmoothing = input(1, minval=1)
DLength = input(3, minval=1)
Level = input(50, minval=1)
//-------------------------
line2 = input(true, "---- Relative Momentum Index ----")
LengthRMI = input(20, minval=1)
BuyZone = input(40, minval=1)
SellZone = input(70, minval=1)
reverse = input(false, title="Trade reverse")
posReversal123 = Reversal123(Length, KSmoothing, DLength, Level)
posRMI = RMI(LengthRMI,BuyZone, SellZone)
pos = iff(posReversal123 == 1 and posRMI == 1 , 1,
	   iff(posReversal123 == -1 and posRMI == -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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