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ADX Mean Reversion Strategy

Here the Average Directional Index (ADX) measures overall trend strength. When ADX is low, the market lacks direction and prices tend to oscillate around a mean value. This strategy exploits that behaviour by trading deviations of ADX from its moving average.

Testing indicates an average annual return of about 70%. It performs best in the stocks market.

A long trade is entered when ADX drops below the average minus DeviationMultiplier times the standard deviation and price is below the moving average. A short trade is opened when ADX spikes above the upper band and price is above the average. Positions are closed when ADX reverts toward its average.

This system appeals to traders looking for opportunities during low-trend environments. The stop-loss prevents small mean-reversion trades from growing into large losses if a new trend emerges.

Details

  • Entry Criteria:
    • Long: ADX < Avg - DeviationMultiplier * StdDev && Close < MA
    • Short: ADX > Avg + DeviationMultiplier * StdDev && Close > MA
  • Long/Short: Both sides.
  • Exit Criteria:
    • Long: Exit when ADX > Avg
    • Short: Exit when ADX < Avg
  • Stops: Yes, percent stop-loss.
  • Default Values:
    • AdxPeriod = 14
    • AveragePeriod = 20
    • DeviationMultiplier = 2m
    • CandleType = TimeSpan.FromMinutes(5)
  • Filters:
    • Category: Mean Reversion
    • Direction: Both
    • Indicators: ADX
    • Stops: Yes
    • Complexity: Intermediate
    • Timeframe: Intraday
    • Seasonality: No
    • Neural networks: No
    • Divergence: No
    • Risk Level: Medium
namespace StockSharp.Samples.Strategies;

using System;
using System.Collections.Generic;

using Ecng.Common;

using StockSharp.Algo;
using StockSharp.Algo.Candles;
using StockSharp.Algo.Indicators;
using StockSharp.Algo.Strategies;
using StockSharp.BusinessEntities;
using StockSharp.Messages;

/// <summary>
/// ADX Mean Reversion strategy.
/// This strategy enters positions when ADX is significantly below or above its average value.
/// </summary>
public class AdxMeanReversionStrategy : Strategy
{
	private readonly StrategyParam<int> _adxPeriod;
	private readonly StrategyParam<int> _averagePeriod;
	private readonly StrategyParam<decimal> _deviationMultiplier;
	private readonly StrategyParam<DataType> _candleType;
	private readonly StrategyParam<decimal> _stopLossPercent;

	private decimal _prevAdx;
	private decimal _avgAdx;
	private decimal _stdDevAdx;
	private decimal _sumAdx;
	private decimal _sumSquaresAdx;
	private int _count;
	private readonly Queue<decimal> _adxValues = [];

	/// <summary>
	/// ADX Period.
	/// </summary>
	public int AdxPeriod
	{
		get => _adxPeriod.Value;
		set => _adxPeriod.Value = value;
	}

	/// <summary>
	/// Period for calculating mean and standard deviation of ADX.
	/// </summary>
	public int AveragePeriod
	{
		get => _averagePeriod.Value;
		set => _averagePeriod.Value = value;
	}

	/// <summary>
	/// Deviation multiplier for entry signals.
	/// </summary>
	public decimal DeviationMultiplier
	{
		get => _deviationMultiplier.Value;
		set => _deviationMultiplier.Value = value;
	}

	/// <summary>
	/// Candle type.
	/// </summary>
	public DataType CandleType
	{
		get => _candleType.Value;
		set => _candleType.Value = value;
	}

	/// <summary>
	/// Stop-loss percentage.
	/// </summary>
	public decimal StopLossPercent
	{
		get => _stopLossPercent.Value;
		set => _stopLossPercent.Value = value;
	}

	/// <summary>
	/// Constructor.
	/// </summary>
	public AdxMeanReversionStrategy()
	{
		_adxPeriod = Param(nameof(AdxPeriod), 14)
			.SetGreaterThanZero()
			
			.SetOptimize(10, 20, 5)
			.SetDisplay("ADX Period", "Period for ADX indicator", "Indicators");

		_averagePeriod = Param(nameof(AveragePeriod), 20)
			.SetGreaterThanZero()
			
			.SetOptimize(10, 50, 10)
			.SetDisplay("Average Period", "Period for calculating ADX average and standard deviation", "Settings");

		_deviationMultiplier = Param(nameof(DeviationMultiplier), 2m)
			.SetGreaterThanZero()
			
			.SetOptimize(1.5m, 3m, 0.5m)
			.SetDisplay("Deviation Multiplier", "Multiplier for standard deviation", "Settings");

		_candleType = Param(nameof(CandleType), TimeSpan.FromMinutes(5).TimeFrame())
			.SetDisplay("Candle Type", "Type of candles to use", "General");

		_stopLossPercent = Param(nameof(StopLossPercent), 2m)
			.SetGreaterThanZero()
			
			.SetOptimize(1m, 3m, 0.5m)
			.SetDisplay("Stop Loss %", "Stop loss as percentage of entry price", "Risk Management");
	}

	/// <inheritdoc />
	public override IEnumerable<(Security sec, DataType dt)> GetWorkingSecurities()
	{
		return [(Security, CandleType)];
	}
	/// <inheritdoc />
	protected override void OnReseted()
	{
		base.OnReseted();

		_prevAdx = 0;
		_avgAdx = 0;
		_stdDevAdx = 0;
		_sumAdx = 0;
		_sumSquaresAdx = 0;
		_count = 0;
		_adxValues.Clear();
	}


	/// <inheritdoc />
	protected override void OnStarted2(DateTime time)
	{
		// Create ADX indicator
		var adx = new AverageDirectionalIndex { Length = AdxPeriod };

		// Create subscription and bind indicator
		var subscription = SubscribeCandles(CandleType);
		subscription
			.BindEx(adx, ProcessCandle)
			.Start();

		// Setup chart visualization
		var area = CreateChartArea();
		if (area != null)
		{
			DrawCandles(area, subscription);
			DrawIndicator(area, adx);
			DrawOwnTrades(area);
		}

		// Enable position protection
		StartProtection(
			takeProfit: new Unit(0m), // We'll manage exits ourselves based on ADX
			stopLoss: new Unit(StopLossPercent, UnitTypes.Percent)
		);

		base.OnStarted2(time);
	}

	private void ProcessCandle(ICandleMessage candle, IIndicatorValue adxValue)
	{
		// Skip unfinished candles
		if (candle.State != CandleStates.Finished)
			return;

		// Check if strategy is ready to trade
		if (!IsFormedAndOnlineAndAllowTrading())
			return;

		var adxTyped = (AverageDirectionalIndexValue)adxValue;
		
		if (adxTyped.MovingAverage is not decimal currentAdx)
			return;

		var dx = adxTyped.Dx;

		if (dx.Plus is not decimal plusDi || dx.Minus is not decimal minusDi)
			return;

		// Update ADX statistics
		UpdateAdxStatistics(currentAdx);

		// Save current ADX for next iteration
		_prevAdx = currentAdx;

		// If we don't have enough data yet for statistics
		if (_count < AveragePeriod)
			return;

		// Check for entry conditions
		if (Position == 0)
		{
			// Positive trend strength should correspond to price direction for entry
			var direction = plusDi > minusDi ? Sides.Buy : Sides.Sell;

			// ADX is significantly below its average - mean reversion expects it to rise
			// This could indicate a period of low trend strength that might change
			if (currentAdx < _avgAdx - DeviationMultiplier * _stdDevAdx)
			{
				if (direction == Sides.Buy)
				{
					BuyMarket(Volume);
					LogInfo($"Long entry: ADX = {currentAdx}, Avg = {_avgAdx}, StdDev = {_stdDevAdx}, +DI > -DI");
				}
				else
				{
					SellMarket(Volume);
					LogInfo($"Short entry: ADX = {currentAdx}, Avg = {_avgAdx}, StdDev = {_stdDevAdx}, +DI < -DI");
				}
			}
			// ADX is significantly above its average - mean reversion expects it to fall
			// This could indicate a period of high trend strength that might weaken
			else if (currentAdx > _avgAdx + DeviationMultiplier * _stdDevAdx)
			{
				// For high ADX values, we're more cautious and might want to go against the direction
				// as extremely high ADX may indicate trend exhaustion
				if (direction == Sides.Sell)
				{
					BuyMarket(Volume);
					LogInfo($"Long entry (trend strength exhaustion): ADX = {currentAdx}, Avg = {_avgAdx}, StdDev = {_stdDevAdx}");
				}
				else
				{
					SellMarket(Volume);
					LogInfo($"Short entry (trend strength exhaustion): ADX = {currentAdx}, Avg = {_avgAdx}, StdDev = {_stdDevAdx}");
				}
			}
		}
		// Check for exit conditions
		else if (Position > 0) // Long position
		{
			if (currentAdx > _avgAdx)
			{
				ClosePosition();
				LogInfo($"Long exit: ADX = {currentAdx}, Avg = {_avgAdx}");
			}
		}
		else if (Position < 0) // Short position
		{
			if (currentAdx < _avgAdx)
			{
				ClosePosition();
				LogInfo($"Short exit: ADX = {currentAdx}, Avg = {_avgAdx}");
			}
		}
	}

	private void UpdateAdxStatistics(decimal currentAdx)
	{
		// Add current value to the queue
		_adxValues.Enqueue(currentAdx);
		_sumAdx += currentAdx;
		_sumSquaresAdx += currentAdx * currentAdx;
		_count++;

		// If queue is larger than period, remove oldest value
		if (_adxValues.Count > AveragePeriod)
		{
			var oldestAdx = _adxValues.Dequeue();
			_sumAdx -= oldestAdx;
			_sumSquaresAdx -= oldestAdx * oldestAdx;
			_count--;
		}

		// Calculate average and standard deviation
		if (_count > 0)
		{
			_avgAdx = _sumAdx / _count;
			
			if (_count > 1)
			{
				var variance = (_sumSquaresAdx - (_sumAdx * _sumAdx) / _count) / (_count - 1);
				_stdDevAdx = variance <= 0 ? 0 : (decimal)Math.Sqrt((double)variance);
			}
			else
			{
				_stdDevAdx = 0;
			}
		}
	}
}