The Lazybear wave trend oscillator trading with Crosses trading strategy performance (Patreon)

Introduction

Hello my dear blog readers and welcome to this post about the ‘Wave trend with cross’ trading strategy. Right off the bat I will tell you that this will be a blog post only (exclusive?) trading strategy. So I will not make a Youtube video about this algorithm.

The strategy

As you might already know, the Freqtrade developers have a separate Github repository where they keep their trading strategies for the general public. These strategies are there for your inspiriration and learnings.

I have already tested loads of these strategies to see if they are profitable or not. Some are really simple and effective and some are complex, hard to understand and have bad results on top of that as well…

This ‘Wave trend strategy‘ is one of the strategies that is available in the Freqtrade strategies repository and it was time for me to test if this one had the potential to be profitable for trading.

This strategy was created by Massoud Azizi on a request of a Discord member:

# WTC Strategy: WTC(World Trade Center Tabriz)

# is the biggest skyscraper of Tabriz, city of Iran

# (What you want?it not enough for you?that's just it!)

# No, no, I'm kidding. It's also mean Wave Trend with Crosses

# algo by LazyBare(in TradingView) that I reduce it

# signals noise with dividing it to Stoch-RSI indicator.

# Also thanks from discord: @aurax for his/him

# request to making this strategy.

# hope you enjoy and get profit

# Author: @Mablue (Masoud Azizi)

The strategy is based on the Wavetrend strategy by LazyBear [1] [2] on Tradingview.

The WaveTrend Oscillator combines a moving average with a long-term and short-term wave to generate its signals. It consists of two lines: the WaveTrend line and the Signal line.

The WaveTrend line represents the overall trend and is calculated using a moving average, typically the EMA (Exponential Moving Average). It helps identify the direction of the market.

The Signal line acts as a trigger line and helps generate buy and sell signals. It is derived from the WaveTrend line and is often smoothed using a moving average, such as the SMA (Simple Moving Average) or EMA.

The WaveTrend Oscillator generates buy signals when the WaveTrend line crosses above the Signal line in oversold conditions, indicating a potential bullish trend. Conversely, sell signals are generated when the WaveTrend line crosses below the Signal line in overbought conditions, indicating a potential bearish trend.

Traders use the WaveTrend Oscillator in conjunction with other technical analysis tools to confirm signals and make informed trading decisions. Like any indicator, it has its own strengths and limitations and should be used in conjunction with other forms of analysis to validate its signals.

The developer Masoud Azizi has tried to create a strategy that is based on this wavetrend oscillator and it is my challenge to determine if this strategy is profitable.

So, let’s start with the initial backtest results of the rough strategy code.

Initial backtest results

The initial backtest results show that this strategy certainly has potential to make gains in the market. In total it gained 1541% profits over the backtesting period.

However, these profits have a huge caviat because it is only the result of the 9% of winning trades that this strategy has from only 24% of the 50 pairs that were used in this test. The drawdown of 67% is also worrying too.

Winning and losing streaks

Lately I have also worked on two other metrics for determinging the best strategy and it’s behaviour, and those are the winning and losing streaks. A winstreak is a series of uninterrupted winning trades and gives you an impression on how high the chances are that after a certain amount of wins there is a losing trade. Here I have calculated the maximum (M) and average (A) winstreak. I have done the same for the losing streak as well. There is a huge psychological factor in the fact that if you have some losing trades, you have an expectation (or hope) how long it will take that you have a winning trade again. Also here I calculated the maximum and average amount of losing tradesover the complete backtesting period and over all pairs traded.

And in the case of the wave trend strategy you can see in the table that there is a maximum winning streak of 3, with an average of 1. But the backtest has experienced a huge 87 losing trade streak, with anaverage of 25 losers after another… I guess you have to have real good faith in your strategy to endure 25 losing trades after another and still continue.

This also has an effect on something I have used earlier and that is the risk of ruin. Your account size has to endure a maximum of 87 losses and still have money left to make another trade that hopefully makes the real money. Something you will have to consider really good.

Optimization

So what if I optimize the buy, sell, roi and stoploss settings. How will the strategy then perform? Are the original settings just poorly chosen and can this strategy be optimized or what?

Unfortunately after slighty less than 5 hours of optimizing and then backtesting these optimized settings I got the additional backtest results (last row in the backtest results table HO=1).

You can see in the table above that optimization may not always mean ‘improvement’. For some reason the hyperparameter optimization has determined parameters that were proven to be even worse than the original ones.

It could be that optimization in this case had to be done in stages and asking to optimize more than two at the same time proves to be too much for a machine learning algorithm. The only things that were ‘improved’ were the pairs that respond to the strategy and the win/lose streaks. But to say that this makes me happy…

Strategy league

So with these scores, this strategy still manages to score above some of the other ‘low’ scoring strategies. But as you can see it has the lowest win rate of all tested algo’s until now.

We also now with the newly developed win/lose streaks that you really do not want to use this strategy unless you have rock solid faith that at some point it will trade ‘the big winner’. I do not score a strategy on these metrics (for now…). So this information does not count against it’s scoring, but it is valuable knowledge you only got from reading this post!

Conclusion & Files

If you have gotten this far reading this post, congrat’s! You now have more knowledge on how to determine if a certain trading strategy is worth risking your money for.

The files were posted earlier on Patreon in this post: https://www.patreon.com/posts/84970284

Thanks for reading and I’ll see you in my next post/video.

Goodbye!