Have built this on my earlier published indicator Band-Zigzag-Trend-Follower. This is just one possible implementation of strategy on Band-Based-Zigzag.
- Experimental prototype. Not financial advise and strategy not guaranteed to make money despite backtest results
- Not created or tested for any specific instrument or timeframe
- Test and adopt with own risk
This is trend following strategy built based on Bands and Zigzag. Traits of trend following strategies are
- Lower win rate (Yes, thats right)
- High risk reward (Compensates low win rate)
- Higher drawdown
- If market is choppy, trend following methods suffer.
The script implements few points to overcome the negatives such as lower win rate and higher drawdown by actively assessing pivots on the direction of trend along. This helps us take regular profits and exit on time during the end of trend. Most of the other concepts are defined and explained in indicator - Band-Zigzag-Trend-Follower and Band-Based-Zigzag
Defining a trend following method is simple. Basic rule of trend following is Buy High and Sell Low (Yes, you heard it right). To explain further - methodology involve finding an established trend which is flying high and join the trend with proper risk and optimal stop. Once you get into the trade, you will not exit unless there is change in the trend. Or in other words, the parameters which you used to define trend has reversed and the trend is not valid anymore.
🎯 Using bands
When price breaks out of upper bands (example, Bollinger Band , Keltener Channel, or Donchian Channel), with a pre determined length and multiplier, we can consider the trend to be bullish and similarly when price breaks down the lower band, we can consider the trend to be bearish .
🎯 Using Pivots
Simple logic using zigzag or pivot points is that when price starts making higher highs and higher lows, we can consider this as uptrend. And when price starts making lower highs and lower lows, we can consider this as downtrend. There are few supertrend implementations I have published in the past based on zigzags and pivot points .
Drawbacks of both of these methods is that there will be too many fluctuations in both cases unless we increase the reference length. And if we increase the reference length, we will have higher drawdown.
🎯 Band Based Zigzag Method
- Here we use bands to define our pivot high and pivot low - this makes sure that we are identifying trend only on breakouts as pivots are only formed on breakouts
- Our method also includes pivot ratio to cross over 1.0 to be able to consider it as trend. This means, we are waiting for price also to make new high high or lower low before making the decision on trend. But, this helps us ignore smaller pivot movements due to the usage of bands.
- I have also implemented few tricks such as sticky bands (Bands will not contract unless there is breakout) and Adaptive Bands (Band will not expand unless price is moving in the direction of band). This makes the trend following method very robust.
- To avoid fakeouts, we also use percentB of high/low in comparison with price retracement to define breakout.
Settings are fairly simpler and are explained as below. You will find most of the required information in tooltips.
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