We try to buy when a) prices move upwards fast b) prices move downward fast. Usually the change in prices is compared to change in time. But now we try to compare the change in time with respect to change in price.
Step 2: Selecting Indicators for Trading System
The Aroon Indicator was given name from the Sanskrit word ‘Arun’ which means early light in morning. This name was chosen by its developer Tushar Chande because it is used to identify emerging trends and reversal movement.
The Aroon-up calculates the number of candles since a new high is made, while the Aroon-down measures the number of candles since a new low is made.
We use a large Aroon period- 100 to smoothen it for fewer signals.
Step 3: Defining Clear Strategy Rules For Aroon Indicator AFL
Buy: Buy Aroon-Up crosses above Aroon-Down
Sell: Sell when Aroon-Up crosses below Aroon Down
Step 4: AFL Coding Guide
This is perhaps the simplest afl trading system in which the afl code can be understood by non-programmers also. We carefully define the Buy, Sell, Short and Cover rules; where Short and Cover are symmetrically opposite if Buy and Sell. This helps in smooth integration of this AFL with automated trading systems
Step 5: The Backtest
Even in the simplest form, the Aroon Indicator AFL is profitable in Bank Nifty current month futures. It generates a profit of 4774 points, or Rs. 3,58,050/ over two years on one lot (75 shares). The winner% is 42.40, which is also okay for such a simple system.
Related Article: Basics in Strategy Backtesting
- Scrip: Bank Nifty current month futures, 15-minute
- All trades executed at Close price of the bar on which signal is triggered
- Brokerage: 0.01% of Trade Value
- Data History: 01-01-2014 to 31-12-2015 (two years)
- Strategy Optimization: None
Step 6: Further Improvement
We leave it to the readers to suggest any improvement in Step 2 and Step 3 which can increase the profitability. We can introduce custom stoploss as well as profit targets to further maximize the profitability.
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