Algorithms from Base Indicators

Here the trading algorithms obtained directly from the base indicator are described.

Algorithms Obtained from Base Indicators

List of Algorithms

The trading algorithms derived directly from the base indicator are:

greater than threshold
positive
less than threshold
negative
between thresholds

Hence:

Base indicator greater than threshold
Base indicator positive
Base indicator less than threshold
Base indicator negative
Base indicator between thresholds

For instance:

Accumulation Distribution greater than threshold
Accumulation Distribution positive
Accumulation Distribution less than threshold
Accumulation Distribution negative
Accumulation Distribution between thresholds

Description

Base Indicator Greater Than Threshold

This algorithm checks whether the base indicator is greater than a threshold, i.e. a particular value, input by the user. So the algorithm is true if and only if

  base indicator > threshold

Base Indicator Positive

This algorithm checks whether the base indicator is positive. So the algorithm is true if and only if

  base indicator > 0

Base Indicator Less Than Threshold

This algorithm checks whether the base indicator is less than a threshold., i.e. a particular value, input by the user. So the algorithm is true if and only if

  base indicator < threshold

Base Indicator Negative

This algorithm checks whether the base indicator is negative. So the algorithm is true if and only if

  base indicator < 0

Base Indicator Between Thresholds

This algorithm checks whether the base indicator is between two thresholds, i.e. two particular values, input by the user. So the algorithm is true if and only if

  lower threshold < base indicator < upper threshold

Threshold

In general the threshold can take on any value:

  threshold ∊ (-∞, + ∞)

but for each algorithm can have its own bounds, detailed in the Parameters paragraph in the description pane.

Examples of Application

Greater Than Threshold: Strong Uptrend or Overbought

The greater than algorithms are particularly useful for bounded indicators, like the RSI. According to the literature, for instance, if the RSI is greater than 70, there is a strong uptrend or an overbought market. So, select the algorithm

  RSI greater than threshold

and input a threshold of 70.

Greater Than Threshold

As you can see, a lot of information is reported in the description pane. The Literature signals assume you are checking for a high threshold, not a low one. This is exactly what we are doing here. But you can input any threshold, just ponder carefully its meaning in terms of signals. The Parameters section reminds you the range of the threshold, which corresponds to the range of the RSI.

If you run it, you can see the algorithm is true (equal to 1 in charts) whenever the RSI is greater than 70. Otherwise it is false (0 in charts). Where the algorithm is true, the market is classically considered in strong uptrend or overbought. If you favor the strong uptrend, you should use this algorithm in the Long tab, to enter a long position. If you favor the overbought, you might consider using this algorithm in the Liquidate long tab, to liquidate long positions.

Less Than Threshold: Strong Downtrend or Oversold

Analogously to the previous example, according to literature, if the RSI is less than 30, there is a strong downtrend or an oversold market. By selecting the

  RSI less than threshold

algorithm and inputting a threshold of 30 you can see when this happens. Where the algorithm is true, the market is classically considered in strong downtrend or oversold. If you favor the strong downtrend, you should use this algorithm in the Short tab, to enter a short position. If you favor the oversold, you might consider using this algorithm in the Liquidate short tab, to liquidate short positions.

Between Thresholds: Congestion

According to literature, if the RSI is around 50, there is a congestion. By selecting the

  RSI between thresholds

algorithm and inputting for instance:

  lower threshold = 45
  upper threshold = 55

you can see when this happens. Where the algorithm is true, the market is classically considered in congestion.

Conventional trend following algorithms assume a trending market. A typical example is to enter a long position when the close price goes above the moving average of the price. However, in a congestion phase, you might want to apply the opposite of the trend following algorithm, i.e. to enter a long position when the close price goes below the moving average of the price. You can do that by 'ANDing' the two algorithms together, in the Long tab. Note that, in order to apply the opposite algorithm, you could use the 'straight' one

  Close greater than MA of EMA

and check its NOT checkbox. However, this always results in slower computation speed, so this is definitely not the recommended way.

Not Between Threshold: Not in Congestion

Usually, you should not trade trend following algorithms during a congestion phase of the market. As seen in the previous example, you can check whether the RSI is within a range of values. But if you select the NOT checkbox of the algorithm, the logic is inverted, and hence we can check whether the RSI is outside a range.

If we do that, with the same thresholds as in the previous example, we obtain the inverted figure. Now we are checking when the market is not in a congestion phase.

You can 'AND' this algorithm with a trend following algorithm, to make sure you apply the trend following technique only out of congestion.

Greater Than Threshold: High Volatility

Through the Greater Than Threshold algorithms you can spot periods of high volatility in the market. Just pick up a volatility indicator and check when its value is higher than a threshold. For instance the standard deviation is one of the most used; in order to make it more consistent throughout price ranges, we can use its percentage version. When the algorithm is true, volatility is high. If you want to liquidate your positions when volatility is high, put this indicator in the Liquidate tabs, maybe in the only one present when not distinguishing between long and short.

Less Than Threshold: Low Volatility

If you want to spot where volatility is low, check when a volatility indicator is less than a threshold. As in the previous example, we can take the standard deviation in its percentage version. When the indicator

  Standard deviation percentage 
    less than threshold

is true, volatility is low.

If you want to enter a long position only when volatility is low, 'AND' this algorithm with another algorithm saying when to go long, in the Long tab.

Positive: Uptrend

Examples of application for this kind of algorithms are checking whether the market is trending. An indicator like the Momentum is classically considered to indicate an uptrend when positive. So select this algorithm for the Momentum.

Where the algorithm is true, the market is up-trending. You can use this algorithm in the Long tab, to enter a long position.

Negative: Downtrend

Similarly to the previous example, you can use this kind of algorithms to highlight down-trending market. E.g. select the

  Momentum negative

algorithm. Where the algorithm is true, the market is down-trending. You can use this algorithm in the Short tab, to enter a short position. Note that this curve is the inverted of the previous example.

Greater Than Threshold: Bollinger Band Width

The Bollinger Band is thought to forecast an imminent strong trend when its width 'squeezes'. If you want to adopt this strategy, you want to detect when the squeeze is over. For this, the idea is to exploit the Step checkbox of algorithms, where the transitions from false to true is detected. If you select the

  Bollinger Band width percentage
    greater than threshold

you check where the width has a high value. If you select its Step checkbox, you detect where the width passes from small to big, i.e. when the squeeze finishes. According to the literature, this is the time when a strong trend begins.

If you 'AND' this algorithm with a trend following one, you get a high probability to run the trend. One of such a trend following algorithm, classically is the breakout of the band. So you can pick up the

  High greater than MA of
    Bollinger Band upper line

maybe with different input parameters.