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Trading indicator strategies on AAX

In this article we will be looking at a potential trading indicator set up based on the EMA ribbons.

If you want to refresh yourself on the AAX custom EMA ribbon indicator then check our previous article.

Before proceeding with this article, we recommend that you watch the video on the EMAR to allow for better understanding of this potential strategy.

As usual this is not financial advice and is for educational purposes only.

Introduction

This EMAR indicator strategy relies on the custom AAX EMAR indicator. Below we can see an example of what this indicator looks like when fully set up.

EMAR – VIDT/USD

Reminder – How to set up the EMAR on AAX

In the table below there is a reminder on how to set up the EMAR indicator on AAX. The EMAR is not a preset indicator, however in the table below we can see the set up for it.

IndicatorData periodSupport/resistance provided
Moving Average Exponential15low
Moving Average Exponential20low
Moving Average Exponential25low
Moving Average Exponential30low
Moving Average Exponential35low
Moving Average Exponential40medium
Moving Average Exponential45medium
Moving Average Exponential50medium
Moving Average Exponential100medium
Moving Average Exponential200high
Moving Average Exponential500high
Moving Average Exponential1000high
Moving Average Exponential2500high

Signals from the strategy

When receiving signals from the EMAR strategy certain conditions need to be met in order to allow for accurate long/short positions. No indicator strategy is ever 100% reliable, however we use indicators and strategies in order to prevent substantial losses with the aim of sustainable portfolio growth.

Strategy version 1.0 – basic EMAR

In this version of the strategy, signals for buying/selling occur when the candles close one period after an extreme move above or below the EMAR. The strategy is built around the 1hr chart, as our analysis has shown that risk/reward levels are most effective on this chart. For the strategy we have used the time period between 15/02/21 – 17/03/21. This is not a long time period however on the hourly chart 738 bars have been taken into account. The time period selected also has a mix of bearish, bullish and sideways movements. All research conducted has been based around the BTC/USDT and BTC/USDC pairing.

Important notes:

  • This strategy is most effective during periods of high volatility
  • This strategy allows for minor interpretation when looking at buying/selling as whether a candle has closed above or below a line can be very marginal.

Extreme zones explained

            Positive extreme zone (PEZ)

The PEZ is when the candles are above all of the EMAs of the EMAR. In the picture below we can see three circled examples of when the candles are in the PEZ. With the strategy version PPEMAR1.0 all buy signals can only occur when the candles are within the positive extreme zone.

BTC/USD EMAR1.0 PEZ

            Negative zones (NZ)

Selling on this indicator occurs when BTC/USD is within the NZ not the NEZ (Negative Extreme Zones). Below we can see an example of BTC within the NZ. BTC is within the NZ when it falls below the last of the shorter length support EMAs (the last support EMA must be between the 15-50 length).

BTC/USD EMAR1.0 NZ

Buying / selling signals

Buying conditions for signal = BTC must have crossed into the PEZ and have a second candle closed above the first support EMA of the EMAR. Below we can see an example of a buy signal. The buy signal occurs on the opening of candle 3. Candle 2 closing above the upper EMA could then be seen as a buy signal.

BTC/USD EMAR buy signal

Selling conditions for sell signal = Sell signals occur once the candles fall below the shorter length EMAs (the EMA cluster). Below we can see an example of a sell signal, with the sell signal occurring on the opening of 3. Like the buy signal, patience is needed.

BTC/USD EMAR sell signal

Buy / Sell signals – profitability example

In the picture below we can see the buy and sell signals triggered between 15/02/21 – 17/03/21.

Data set one

Buy DateBuy PriceSell DateSell PriceClosed PnLIf 100K start
15/02/214857322/02/2155838+14%114.0K
01/03/214624902/03/2147420+2.5%116.85K
03/03/214887504/02/2149686+1.6%118.7K
05/03/214920306/03/2148218-2.1%116.2K
06/03/214858515/03/2158799+21%140.6K

Total gain = +40.6K

If BTC had been HODLed from first buy signal = +18% = +18K

In this scenario from the data taken we can see that using the PPEMAR setup was significantly more effective than simply HODLing.

Signal success rate = 80%

However, this is a small data set. To try and pick holes in the method, the method is now being used in a period of low volatility. This is an area where HODLing is typically more effective than indicator trading.

Data set two

Buy DateBuy PriceSell DateSell PriceClosed PnLIf 100K start
05/01/213252110/01/2139887+22.6%122.6K
13/01/213720515/01/2136903-0.9%121.5K
16/01/213742116/01/2136395-2.8%118.01K
18/01/213642718/01/2135988-1.3%116.48K
19/01/213659220/01/2136396-0.6%115.78K

Total gain = +15.78K

If BTC had been HODLed from start of signal = +11% (+11K)

Signal success rate = 20%

Between the two datasets there was a signal success rate of 50%, which on the whole is a poor success rate. However all major losses were missed, with the largest closed PnL of -2.8%. During the period of these two data sets HODLers would have had to stomach holding during two x<-25% loss periods (-26% & -28%). Due to the low closed PnL losses, the risk/reward ratio when using this strategy is good.

EMAR basic strategy conclusion

In conclusion the EMAR strategy is good at preserving wallet capital, however is ineffective during periods of low volatility. This is the same for many indicators on the hourly chart. Therefore being able to identify when to and when not to use this strategy is vital. The ability to do this will come with time, perseverance and education. For example the ability to identify symmetrical triangles would have prevented the final -0.6% loss.

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