PINE SCRIPT: 75% Win Rate on a Simple Pullback Strategy

hi Traders welcome back to another video today I want to start a new YouTube series and this series is going to be kind of a strategy development investigation kind of process where I'm going to go and find strategy ideas out on the web on the internet I know how dangerous that sounds but don't worry we're going to vet these ideas using code and running trading ideas through the strategy tester and the whole purpose of this series is one I'm doing it anyway it's something that I do in my spare time anyway but two hopefully it will give me a good opportunity to show you guys demonstrate to you guys some coding practices techniques Concepts that are practical that we can build on and hopefully this series these videos that I'm going to start creating over the months and probably years to come will help inspire you guys and motivate you guys to go and find your own trading ideas convert them in the code adapt them to suit your personality your personal trading style and we can all become better Traders together now as mushy as that sounds that's the whole purpose of my YouTube channel and what I do here I'm a Trader I want to get better at trading why not share the journey with you guys and we can all get better together and so without further Ado let's get into today's video it's going to be a bit of a longer one compared to the recent videos I've done but I think it's going to be extremely valuable recently I've been going through a mentorship program with Nick Raj he's an Australian Trader quite well known if you haven't heard of him go and check out his chat with Traders podcast episodes they're brilliant they have some really really powerful trading ideas and lessons included in them I'll leave links Below in the description this morning I was just going through the Forum here and reading up on some trading system articles that Nick Raj particularly has posted there's other students that post strategy ideas but I'm always very interested in what Nick Raj finds interesting uh because he's such a great Trader I like to try to emulate his thought process in the markets I have a very similar philosophy on the markets to him he's obviously far far more experienced than I am he's been trading for decades I've been trading for maybe five years actively but this post here caught my eye this morning so Nick posted this video here by JB marwood the YouTube channel JB marwood um now I don't know anything about Joe but I did watch this video today and I was really impressed by the concepts here and so today I wanted to convert some of these ideas into Pine script show you guys how to build out a simple strategy script to test an idea a trading idea in Pine so before I get started hopefully Joe doesn't mind me doing this I'm obviously giving a shout out to his channel go and check it out there's some really cool trading ideas here some really powerful stuff um today I want to go over his simple pullback training strategy and convert the idea the rules into pain and when we're done we'll get something like this now my results aren't 100 accurate compared to his results but that could be because he's using different data to me um he's using a different back testing software but the results are similar enough and profitable enough to Warrant investigating in pinescript so before I get started I'll play a short clip from his video just to demonstrate the rules that he lays out and again when you finish with this video or even now if you want to I'll leave a link below in the description to this video I definitely encourage you to go and watch the whole video because there's some really important ideas that are laid out in this video but anyway let me break down his rules and again hopefully he's okay with this if you ever see this video Joe and you you're not happy with me um basically stealing your work let me know and I'll take this video down but I just want to share this with my audience because I think this is really important in information and an important template that Traders should be aware of Traders especially my experience I obviously have a lot of Traders come through my Mastery course there's a lot of questions I get where Traders are over complicating trading in a way that I feel is unnecessary trading does not need to be very complex in order for you to make good money out of the markets and this strategy right here is a good example so let me skip forward to the rules here and I'll just play a quick clip from this video right so now let's look at the exact rules of this simple pullback strategy so the buy rules first of all we're going to want to close above the 200-day moving average and close below the 10-day moving average so very basic rules the longer term trend is the 200-day moving average we want to be above that but we want to close below the 10-day moving average so we've got a small pullback within the longer term Trend now the cell rules are extremely important here we're going to CL we're going to sell when the close Rises back above that 10 day moving average so we're not looking for long term trades here we're just looking for short term trades short pullbacks and the other rule is we will sell if we get a 10 loss so if we get a 10 loss we're going to exit on the next bar open okay we need some more settings um that we can put into our back tester um so that we can run an accurate back test so position size we're going to use just all right I'll stop it here I don't want to play too much of his work on my channel again go and check out this video if you're interested so the rules are incredibly simple we're waiting for price to close above the 200-day moving average and close below the 10-day SMA simple moving average that's it the buy rules couldn't be simpler that's something I really love about Nick Raj's work um in his books and his videos online he's a huge advocate for using simple and robust trading rules he goes so far as to say that he doesn't believe that the entry reasons or entry criteria for strategies is a very important aspect of a trading system there are other aspects of a trading system that are far more important such as the overall concept of the system why it makes money and obviously your exit reasons are super important and your money management risk management approach plays a massive role in in the profitability of any trading system the entry criteria is one of the least important criteria it's not not important but it is one of the Lesser important aspects especially when we're trading a robust system so this strategy is extremely simple we're waiting for the entry rules here and then the cell rules are also very simple we um we're waiting for the the candle the bar daily bar this is a daily long-only strategy by the way on the S P 500 ETF that's what this strategy was designed to be traded on but it in my preliminary testing it seems to be profitable on several other markets as well but anyway the cell conditions are once we're in a trade if price closes above 10 day SMA we exit our position we're just trying to capture small chunks of the overall long-term trend um the secondary rule is that if price declines by 10 from our entry price or in other words we have a 10 loss on a closing basis we exit on the next bars open uh we have a position size of 100 of our Capital no Leverage is used starting capital in this back test is 50 000 US Dollars commissions is 0.005 cents per share which is the Interactive Broker rate and execution is entering trades on the next bars open which is luckily how the training view strategy tester works so that's really easy to emulate in today's lesson so let's jump into the pine editor and start coding this into Pine code now before we do that I should probably mention the overall metrics of this system according to Joe's back testing using Amy broker which is a much more powerful strategy tester system than trading view but it's also much more complex I might consider exploring Amy broker code in future lessons if you guys are interested in that I'm learning how to code in AFL the programming language for Amy broker it's a it's a it's a very powerful program but it is also much more complex than Pine there's pros and cons to that the pros are that you can do very extensive statistical analysis of your strategy results over historical data the cons are it's expensive you need extra data so data from a data provider and the code is just harder to learn compared to Pine but anyway that's irrelevant for today's video so the metrics here have a decent annualized return but it is less than Buy and Hold so Buy and Hold Returns on average about 10 per year on the S P 500 this strategy returns about 7.6 percent so it's less profitable than just simply buying and holding the Spy ETF however look at our maximum drawdown the max drawdown of just holding the S P 500 ETF is 55 of your Capital so you lose over half your Capital by just doing nothing and hold holding the ETF but you do make about 10 per year which is okay but this would make a lot of investors uncomfortable and I'm sure a lot of Traders and investors would sell as you near that Max drawdown and then that will affect your annual annual return negatively and so there's a lot of psychological reasons why Buy and Hold is not a good strategy despite the fact that it does have a 10 return on average per year whereas this system has a slightly less return but look at the max drawdown 12 I would take a Max drawdown of 12 any day of the week on any strategy that is well within my risk tolerance and so that's kind of the idea of this strategy it has a much better risk adjusted return than Buy and Hold and it also has a very high win rate 75 win rate is pretty impressive now to achieve that win rate it doesn't make a lot of money on each trade so half a percent per trade but its Edge is in its win rate so this is a strategy where the win rate plays a major part in its profitability I usually trade strategies that are the opposite so the risk reward profile is what accounts for the profitability rather than the win rate so I can trade strategies with 40 45 win rate but with a high risk reward and that is how I tend to make my money whereas this strategy is kind of the opposite we're taking small wins but very frequently anyway let's jump into the pine editor and code all of this into Pine alright so here we are with a blank script a relatively blank script all I've done here is input my default strategy parameters so we have overlay set to true so we're drawing over price action our initial capital is set to 50 000 US Dollars our default quantity type for this strategy is set to percentage of our equity and our quantity value is set to 100 of our account balance so on each trade we get involved with we're trading 100 of our account balance with no leverage our commission type is set to cash per contract and the commission value is set to 0.005 cents per share which as I mentioned earlier is interactive brokers commission rate and interactive brokers is probably one of the most common if not the most common stock trading platform and so that's why we're using this as our default parameters now if you've watched my previous video on the latest update to trading view strategy tester you'll know that they've recently added this bar magnifier setting and I said in that video that we should always turn this on on every single script we write now that is true but only on scripts that have a stop loss and take profit like a fixed stop-loss fixed take profit or entry limit orders for a strategy that operates solely on candle closes it's not necessary because there is no risk of intro bar price action negatively affecting our back testing results if you're not sure what any of that just meant make sure to go back and watch the previous video on this channel about the latest strategy tester update I'll leave a link to that in the description as well so we don't need magnifier for this particular strategy let's move on to getting our user inputs so to save time I'm just going to copy and paste some code I've already written because it's not important how the user input code is written but we need several inputs here so we need two moving averages one is the 200 SMA the other is a 10 SMA 10 period SMA so a long term and a short-term moving average second or third parameter here is our stop loss percentage so by default that's set to 0.1 or 10 percent so if price declines 10 from our entry we exit our position so that's basically a Fail-Safe stop loss so if price never closes back above the 10 period SMA we can still exit our trade for a loss to cut our losses short and instead of letting our losses run too far the final inputs here are just a start date and an end date filter these are used for analyzing in Sample and out of sample periods I'm not going to go into too much detail about statistical analysis of our back testing results in this video because it will make this video way too long that's a subject that deserves its own series let alone video and maybe I'll cover that in the future if you guys are interested in it I'm no expert on that stuff I'm not very good with mathematics to be perfectly honest with you guys but I am learning a lot about this stuff through Nick Rogers courses and so in the future I will probably record lessons on this super important subject effect of deep and robust back testing processes but for now keep things as simple as possible and just focus on the pine code so today's lesson is just an example a strategy example how to code a really simple concept into code into Pine code and then test that theory in a simple but quick manner the next thing we need to do is get our indicator values so again I'll just paste this code to save time it's really simple we're just getting two moving averages two smas using T8 or SMA both based on the closing price Source price source and one with a 200 one with a 10 period now I need to replace these without inputs so that we can adjust these moving average length in the settings menu if we want to so now if I save my code we should have these settings up here there they are and they have little tool tips explaining what each setting does this is completely optional I'm only doing this because this is a YouTube video script and I want you guys to fully understand what each user input does now next thing we need to do is get our date filter so again I'll paste that code in really simple here we're just checking if the current bars time is greater than or equal to our start date and time and is the current bars time less than or equal to our end date and time so this allows us to filter what trades get taken based on a date period now we get to the juicy part where we check our buy and sell conditions so remember the rules are really simple the first thing we need to do before I get to the rules is save our Buy price so I'm just going to initialize a persistent variable VAR variables mean that they don't reset on every single bar it's a float type so it's a number type with a decimal place and it's going to be set to Zero by default on the very first bar in our chart and then we'll obviously overwrite this with our Buy price when we enter a trade that way we can actually calculate our stop loss that 10 decline from our buying price so that we can exit trades that go against us now our buy condition is the closing price greater than our ma1 which is our long-term moving average the 200 period moving average and is the closing price on the current bar less than our short term moving average or the 10 period moving average those are our basic entry conditions but we also need to make sure that we're not already involved in a trade because this strategy does not include pyramiding so we want to check is our position size equal to zero if it's equal to zero we're flat and we want to check our date filter so I'll throw in the date filter here this just checks if the current bar Falls within our two time periods and that's it for our buy conditions now before I continue let's draw some pretty colors onto the chart and by that I mean our moving averages so we're going to plot out ma1 and ma2 onto the chart save my script and now what we're looking for is price to be trading above the 200 period moving average and close below the 10 period moving average and then we buy on the next bars open and we sell when price closes back above that 10 period moving average or Price declines by 10 percent that's it that's all we're looking for so let's finish coding this out we have our buy condition next up we need our cell condition and that remember is just is the closing price greater than our short-term moving average or ma2 let me indent these a little bit to make it easier to read the second condition for selling is that we are currently involved in a trade so to check if we're involved in a trade we just check if position size is greater than zero that means we have open contracts and that's it for our basic cell condition the next thing we need to do is uh check our stop loss so our stop loss remember I'll start with calling it stop distance and stop distance is going to be set to and now this is completely optional what I'm about to do next it does make the code a little bit more difficult to read but it will make our plots easier on the eyes when I'll show you what I mean in a moment but what I'm going to do is check is our strategy dot position size greater than zero question mark if so if this condition is met then we want to calculate our Buy price minus the closing price divided by the closing price this will give us the stop loss distance as a percentage on the current bar so this will calculate the percentage decline from our entry so let's say we entered on this bar here I'll put a horizontal line there that red line this code here will calculate the percentage decline from this red line on each bar on our chart on a closing basis so each bar that closes below this red line um this code will calculate this number here 6.53 or minus 6.53 percent this will calculate this as a positive number so in this case it would be 6.53 not minus six point five three percent and we use that to check our stop loss but before we do that the next thing I want to do is calculate our stop loss price so that's going to be again is our position size greater than zero so are we involved in an open trade if so we subtract our Buy price from our Buy price multiplied by our stop percentage so this is our stop loss percentage Again by default it's 10 or 0.1 so this stop price will calculate again using this red line as our Buy price the stock price will be by default 10 below this line so all the way down about here at one four two one point four five ish so that's our stop loss if we entered on this bar here our stop loss is down here and if we never get a bar that closes Above This short-term moving average but price closes below this red line then we exit our trade for a loss that's our stop loss and then finally the final thing we need to write out here for our buy and sell conditions is our stop loss condition itself and for that again we check is the position size currently greater than zero so we're involved in an open trade and our stop distance so the current decline on a closing basis on a percentage basis from our entry price is greater than our I and I stands for input so input underscore stop percent then that means price has declined by our stop loss percentage point and we need to exit our trade that's it now I know I went over that pretty quickly but I'm trying to keep this video relatively short you can always slow down the video or watch this a couple more times if this went over your head but this is all we need to enter and exit our trades the final thing we need to do is actually tell the strategy tester when to enter and when to exit and that's actually really simple so for enter positions we're going to check if buy oops buy condition remember Pine's case sensitive so if by condition is true then we use the strategy.entry function to enter a trade we need to give it an ID so I'll just call this long wait long only remember this is a long only strategy I believe this kind of strategy is called a long beta strategy so we're just trying to capture long only returns out of the market and in this case we're not even trying to beat the market we're just trying to beat the Market's Max drawdown while maintaining a decent return annual return but anyway the next thing is a direction we need to tell the strategy tester which direction we want to enter our trade today we're long only so we just set that to strategy dot long that's it we're entering our trades based on our buy condition now the next thing we need to do is save our Buy price so that all of this code here can actually be calculated so so far we haven't actually saved a buyer price we do that obviously after we've entered a trade so we need to put that code below our buy condition now because we are entering on the next bars open after the signal or the condition is met so once our buy condition is met the strategy tester let's use this candle right here as an example again so here we get a confirmed entry we're above our 200 period moving average we just close below the 10 period short term that's our entry criteria Matt on this bar that criteria gets met but the strategy tester won't enter our trade until the next bars open which will be about here so when we save our Buy price we don't want to save the signal candles closing price we want to save the next Bar's open price as our Buy price so to do that we can just check if we had a buy condition on the previous bar so if buy condition on the previous bar is true then we save our buy prices the current bars opening price and now we have our Buy price saved and all of our metrics here will be calculated properly and that's it for our entry conditions the next thing is to check out exit criteria to do that really simple we just check if Cell condition so if we have our standard take profit cell condition which is that the current bar closed back above the 10 period moving average so here for example we're trading above both moving averages and then we get a close below the 10 period SMA we would enter long right here we would hold our trade until price closed back above that 10 period moving average and then we would sell on the next bars open so that's what our cell condition is but we also have our stop condition remember so that can also be combined with our cell condition so if we have well sorry or if we have a cell condition or a stop condition then we want to exit our trade and to do that we can simply use the strategy.close function we need to tell it which order to exit in this case that's our long order so we're exiting our entry ID of long on this function here and to make it clear when we exit for a profit or for our stop loss being hit I'm going to add an optional parameter here which is our comment and the comment is just going to say exit so normally it will just say exit if we close our trade however I'm also going to add on a conditional statement here that will say if and let me make some some more room here if we had our stop condition map then add on SL equals true so this is text that's going to display on our chart and it just simply says stop loss equals true so we exited our trade because our stop loss was hit otherwise add nothing to the string because we don't really care we don't this will just differentiate between trades that close back above the 10 SMA And Trades that close blow out 10 decline from our entry and that's it the final thing I'm going to do here is just overwrite our Buy price to n a this is purely for drawing purposes we'll get to that in a moment but now there's only two more lines of code to write and our script is completed and that is I'll just copy this code over to save time it's just two more plots so we're going to plot our Buy price onto the chart so that we can see when the script bought which price it bought at and we're going to plot our stop loss onto the price so that we can see where the script will exit our trade if price declines beyond our stop loss and I set the offset on our stop loss to -1 because the way we've written our code up here it won't actually draw the stop loss until we've been in the trade for one bar so we want to shift our stop loss Lane back one bar so that the two lines are drawing in sync so I'll show you what I mean if we save my code here hopefully this compiles without any errors and there we go it definitely did not so where is our error it's on line 30. I didn't finish our conditional statements here so for these two statements we're just going to add n a on the end so our stop-loss distance if we are not involved in a trade our stop distance is going to be set to n a so that we don't draw anything onto the chart so here stop price set to n a when we're not involved in a trade if we don't do this we'll have lines drawing all over our chart even when we're not involved in a trade we don't want that so when we're not involved in a trade we set our stock price to n a and our Buy price to n a and that way we don't have lines drawing all over the place so now when I save my code hopefully this compiles there we go there's our script completed so let's find a good example here here's one that I was using before as an example so here's our entry conditions met trading above the 200 SMA trading uh closing below the 10 SMA on this bar we enter on the next bars open we enter long and then we hold this trade until price closes above the 10 period SMA or we close below our stop loss now in this case that never happened we actually we didn't hit us we tested our stop loss we didn't close below it but we did close back above the 10 SMA below our entry and so this technically was a losing trade so here uh this Barclays back above the 10 SMA we exit we sell on the next bars open and so here we took a loss of about 3.7 but there's our script completed and if we open up the strategy tester here's our metrics so we have approximately a 12 Max drawdown from um 1995 until today so I set my end filter to 2099 obviously no one near that yet the way time's been flying this year I feel like it won't be long before into 2099 but for now we're trading up until the current day from 1995 and these are our metrics so a net profit of 351 according to the training view strategy tester some of these metrics I feel like the strategy tester calculates a bit weirdly compared to what I'm used to but anyway that's another subject for a different day for now we have a decently profitable strategy over 457 trades over several years with a decent Max drawdown and a half decent return annual return nothing spectacular but considering that this would just be part of a portfolio of strategies this is a really cool concept to investigate further and now before I wrap up this video one thing that Joe speaks about in his video at the very end is talking about how we could expand on this strategy by adding extra rules or conditions to the strategy because it is very very simple now I like to start my strategy development with a really simple idea or concept A arguably too simple idea is better to start with and then you build on that idea so right here we have a strategy that is profitable with a really high win rate that's great how could we improve the results of this strategy what's a simple way we could improve the strategy one way that I can see here that I thought of earlier this morning is it doesn't make a lot of sense to me to just exit as soon as price closes above the 10 SMA I prefer to have a reason to exit my trades and it doesn't have to be a very complex reason but I prefer it to be a little bit more complex than simply disclosing back above a moving average and so what have we added here's a perfect example look at this we we're trading above our 200 SMA we close below our 10 period we enter long on this bars open and then we exit on this bars open after we close back above the SMA what is this this is like a one percent two percent gain one percent gain that's pitiful considering how this Market rallied from here so what if we added a really simple exit reason such as a lower close so we only exit our trade if price is trading above the 10 SMA and we get a candle or a bar that closes below the previous bars low and then we exit on the next bars open let's add that to our code and see how that affects our strategy results so for this I'm going to add it as a user input and I'll just copy some code over to save time so here we've added a new user input that says I underscore so input underscore lower close and it's a Boolean input it's set to false by default and this setting exit on level close simply waits for a lower close before exiting above our short term moving average if I come down to our sell condition line of code here I can add on one more little condition here I can check do we have our standard exit reasons or conditions met so did we close above our short term moving average while involved in an open long trade and is I underscore lower close not turned on so that would return true so if we do not have that setting turned on we will just exit when price closes back above the SMA otherwise if we do have this turned on then we want to check if the current Bar's closing price is lower than previous bars low that's it really simple just a couple of characters of Code here and let's see how it affects our bottom line so I'll save that code let's look at this particular trade right here if I come up to our options or settings here bring it over here we enter along here and this bar is open let's see what happens when I click exit on Lower close so now we stayed in this trade we entered long here rather than exiting right here we held our position until we got a price action confirmation that we should exit now it's a really simple confirmation just simple lower close so this bar here closed lower than the previous bar so we exit we sell our long position on the next Bar's open and that turned a one percent winning trade into a six percent winning trade and we still have our standard stop-loss reasons so here's a here's an example of a losing trade based on our stop loss so exit SL equals true we entered long on this Bar's open after it closed below the 10 period SMA while price was technically above the long-term moving average and then unfortunately the market rolled over but rather than holding on to our loser we eventually exit our trade for approximately I'd say this is like a 9.8 percent loss roughly so let's drag that down 9.5 9.5 loss on that trade but we are now holding our winning trades for much longer um here's a good example of why we use a stop loss back in the covert crash on the market when the market took a dive this is why we use stop losses but let's have a look here let's look for a trade that really played out nicely here's a good one so we enter along here we hold all the way up to this lower close and then we get back into the market uh soon after that exit when price closes back below this SMA so this is a really cool strategy and now here we have a problem price did not close uh above our SMA when we got our lower close and so the script did not exit our position so that's this rule here if you wanted to you could play I'm not going to in today's lesson I want to wrap this up here but if you wanted to you could negate this rule when using the lower close rule and that way the script would have exited up here but because we have a prerequisite of price being above M82 it waited until here to exit that trade if you want to that could be some homework for you I guess to go and edit this code to include that feature and see how that affects your results but now let's look at our metrics our drawdown's gone up slightly gone up by two percent but our return has gone up significantly because our average trade profit has gone up significantly while still maintaining a very high win rate now I'd need to do some more testing to make sure that I haven't missed something and this is actually giving out results that are accurate but the whole point of today's video is not to give you a strategy to go out and test or trade but rather a concept to think about some examples on how you can achieve these things and yeah now I hope this helps you better understand the strategy development process I hope it inspires some ideas for you to go out and play around with and I'll wrap this lesson up here as always the source code will be below a link to the source code will be below in the video description a link to the original video by Joe that inspired this video um basically I just stole his trading idea and adapted it to suit myself in pinescript but you get the idea this is the strategy development process basically is going out finding cool ideas and then adapting them to your personality your personal preferences and then through the power of pine script we can really quickly test this stuff and decide if it's something that we are interested in pursuing further this video is long enough as it is so I'm going to wrap this up here thanks for watching I really appreciate it I hope you have a fantastic weekend and I'll speak with you in the next video take care and good luck with your trading as always

Channel: The Art of Trading

Views: 160,207

Keywords: tradingview, pine script, tradingview indicators, forex algo, crypto algo, stock algo, trading algo, trading algorithm, how to create trading strategies, how to code your own trading scripts, trading scripts, forex scripts, crypto scripts, stock scripts, bitcoin scripts, trading signals, forex signals, crypto signals, stock signals, detect trading setups, pine script mastery, pine script mastery course, how to use tradingview, how to use pine script, scripting, ema

Id: h-erJbnBj6A

Length: 36min 28sec (2188 seconds)

Published: Fri Jul 01 2022