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ATR Trailing Stop Strategy with Fibonacci Retracement Targets

Author: ChaoZhang, Date: 2024-02-28 17:09:12
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Overview

This strategy combines Average True Range (ATR) trailing stop and Fibonacci retracement lines to design a trend following strategy with stop loss protection. When price breaks through the ATR trailing stop line, the strategy starts to follow the trend. At the same time, Fibonacci retracement lines are used to set price targets, achieving an organic combination of trend following, stop loss and take profit.

Strategy Logic

  1. Calculate ATR value and ATR trailing stop line. The ATR trailing stop line is calculated by multiplying ATR value by a factor (e.g. 3.5).
  2. Calculate three Fibonacci retracement lines as profit targets. Fibonacci retracement lines are positioned between the ATR trailing stop line and the new high/low point according to Fibonacci ratios (e.g. 61.8%, 78.6%, 88.6%).
  3. Generate buy/sell signals when price breaks through the ATR trailing stop line to follow the trend.
  4. Set take profit targets at the three Fibonacci retracement lines.

Advantages

  1. ATR stop loss can effectively control risks and prevent losses from expanding.
  2. Fibonacci targets allow decent profits during trends while avoiding chasing tops and bottoms.
  3. The strategy logic is simple and easy to implement.
  4. Flexibility to adjust ATR factor and Fibonacci settings to adapt to different markets.

Risks

  1. Frequent ATR stop loss triggers in ranging markets, leading to excessive trading.
  2. Possibilities of missing pullbacks and adjustments.
  3. Parameter optimization needed for ATR period etc.

Enhancement

  1. Incorporate trend filter to avoid trading in ranging markets.
  2. Add re-entry mechanism to reduce missing pullbacks.
  3. Test and optimize ATR period, ATR multiplier, Fibonacci parameters etc.

Summary

The strategy integrates two important technical analysis methods – ATR trailing stop and Fibonacci retracement for trend following, risk control and profit targeting. With further optimizations, it can become a very practical trend trading strategy that is more robust and adaptive to market conditions.

/*backtest
start: 2023-02-21 00:00:00
end: 2024-02-27 00:00:00
period: 1d
basePeriod: 1h
exchanges: [{"eid":"Futures_Binance","currency":"BTC_USDT"}]
*/

//@version=5
strategy("ATR TrailStop with Fib Targets", overlay=true)

// Input parameters
atrPeriod = input(5, title="ATR Period")
ATRFactor = input(3.5, title="ATR Factor")
Fib1Level = input(61.8, title="Fib1 Level")
Fib2Level = input(78.6, title="Fib2 Level")
Fib3Level = input(88.6, title="Fib3 Level")

// ATR Calculation
atrValue = ta.atr(atrPeriod)

// ATR TrailStop Calculation
loss = ATRFactor * atrValue
trendUp = close[1] > close[2] ? (close - loss > close[1] ? close - loss : close[1]) : close - loss
trendDown = close[1] < close[2] ? (close + loss < close[1] ? close + loss : close[1]) : close + loss
trend = close > close[2] ? 1 : close < close[2] ? -1 : 0
trailStop = trend == 1 ? trendUp : trendDown

// Fibonacci Levels Calculation
ex = trend > trend[1] ? high : trend < trend[1] ? low : na
fib1 = ex + (trailStop - ex) * Fib1Level / 100
fib2 = ex + (trailStop - ex) * Fib2Level / 100
fib3 = ex + (trailStop - ex) * Fib3Level / 100

// Plotting
plot(trailStop, title="TrailStop", color=color.red)
plot(fib1, title="Fib1", color=color.white)
plot(fib2, title="Fib2", color=color.white)
plot(fib3, title="Fib3", color=color.white)

// Buy and Sell Signals
longCondition = close > trailStop and close[1] <= trailStop
shortCondition = close < trailStop and close[1] >= trailStop

if (longCondition)
    strategy.entry("Long", strategy.long)

if (shortCondition)
    strategy.entry("Short", strategy.short)
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