10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
Trading Strategy: Technical Analysis
with Python TA-Lib
J Li Follow
May 14, 2018 · 4 min read
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10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
Photo by Vladimir Solomyani on Unsplash
(This post is also available in my blog)
In finance, a trading strategy is a fixed plan that is designed to achieve a
profitable return by going long or short in markets. The main reasons that a
properly researched trading strategy helps are its verifiability, quantifiability,
consistency, and objectivity.
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10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
For every trading strategy one needs to define assets to trade, entry/exit points
and money management rules. Bad money management can make a
potentially profitable strategy unprofitable.
— From Wikipedia
. . .
Strategies are categorized as fundamental analysis based and technical
analysis based. While fundamental analysis focus on company’s assets,
earnings, market, dividend etc, technical analysis solely focus on its stock
price and volume. Technical analysis widely use technical indicators which
are computed with price and volume to provide insights of trading action.
Technical indicators further categorized in volatility, momentum, trend,
volume etc. Selectively combining indicators for a stock may yield great
profitable strategy. Once a strategy is built, one should backtest the strategy
with simulator to measure performance (return and risk) before live
trading. I have another post covering backtest with backtrader.
As technical indicators play important roles in building a strategy, I will
demonstrate
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10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
simple strategy. (Please do not directly use the strategy for live trading as
backtest is required). If you want to calculate the indicator by yourself, refer
to my previous post on how to do it in Pandas.
In this post, I will build a strategy with RSI (a momentum indicator) and
Bollinger Bands %b (a volatility indicator). High RSI (usually above 70)
may indicate a stock is overbought, therefore it is a sell signal. Low RSI
(usually below 30) indicates stock is oversold, which means a buy signal.
Bollinger Bands tell us most of price action between the two bands.
Therefore, if %b is above 1, price will likely go down back within the bands.
Hence, it is a sell signal. While if it is lower than 0, it is considered a buy
signal. The strategy is a simple voting mechanism. When two indicators
think it is time to buy, then it issues buy order to enter. When both
indicators think it is time to sell, then it issues sell order to exit.
To install TA-Lib and other dependencies on Mac
python3 -m venv tutorial-env
source ~/tutorial-env/bin/activate
pip install panda
pip install pandas_datareader
pip install matplotlib
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10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
pip install cython
brew install ta-lib
pip install TA-lib
Compute Bollinger Bands or RSI
import pandas_datareader.data as web
import pandas as pd
import numpy as np
from talib import RSI, BBANDS
import matplotlib.pyplot as plt
start = '2015-04-22'
end = '2017-04-22'
symbol = 'MCD'
max_holding = 100
price = web.DataReader(name=symbol, data_source='quandl',
start=start, end=end)
price = price.iloc[::-1]
price = price.dropna()
close = price['AdjClose'].values
up, mid, low = BBANDS(close, timeperiod=20, nbdevup=2, nbdevdn=2,
matype=0)
rsi = RSI(close, timeperiod=14)
print("RSI (first 10 elements)\n", rsi[14:24])
Output
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10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
RSI (first 10 elements)
[50.45417011 47.89845022 49.54971141 51.0802541 50.97931103
61.79355957
58.80010324 54.64867736 53.23445848 50.65447261]
Convert Bollinger Bands to %b
def bbp(price):
up, mid, low = BBANDS(close, timeperiod=20, nbdevup=2, nbdevdn=2,
matype=0)
bbp = (price['AdjClose'] - low) / (up - low)
return bbp
Compute the holdings based on the indicators
holdings = pd.DataFrame(index=price.index, data={'Holdings':
np.array([np.nan] * index.shape[0])})
holdings.loc[((price['RSI'] < 30) & (price['BBP'] < 0)), 'Holdings']
= max_holding
holdings.loc[((price['RSI'] > 70) & (price['BBP'] > 1)), 'Holdings']
= 0
holdings.ffill(inplace=True)
holdings.fillna(0, inplace=True)
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10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
Further, we should get the trading action based on the holdings
holdings['Order'] = holdings.diff()
holdings.dropna(inplace=True)
Let’s visualize our action and indicators
fig, (ax0, ax1, ax2) = plt.subplots(3, 1, sharex=True, figsize=(12,
8))
ax0.plot(index, price['AdjClose'], label='AdjClose')
ax0.set_xlabel('Date')
ax0.set_ylabel('AdjClose')
ax0.grid()
for day, holding in holdings.iterrows():
order = holding['Order']
if order > 0:
ax0.scatter(x=day, y=price.loc[day, 'AdjClose'],
color='green')
elif order < 0:
ax0.scatter(x=day, y=price.loc[day, 'AdjClose'], color='red')
ax1.plot(index, price['RSI'], label='RSI')
ax1.fill_between(index, y1=30, y2=70, color='#adccff', alpha='0.3')
ax1.set_xlabel('Date')
ax1.set_ylabel('RSI')
ax1.grid()
ax2.plot(index, price['BB_up'], label='BB_up')
ax2.plot(index, price['AdjClose'], label='AdjClose')
Read more stories this month price['BB_low'],
ax2.plot(index, when you create a freelabel='BB_low')
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10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
ax2.fill_between(index, y1=price['BB_low'], y2=price['BB_up'],
color='#adccff', alpha='0.3')
ax2.set_xlabel('Date')
ax2.set_ylabel('Bollinger Bands')
ax2.grid()
fig.tight_layout()
plt.show()
The below, I plot the action with green points (entry points) and red points
(exit points) with the Adjusted Close Price of the McDonald (2015 April to
2017 April). Alongside, the RSI indicators and Bollinger Bands are plotted
to show how two indicators contribute to a trading action. From the graph,
it shows the strategy is good. It captures a couple relative some low prices
and high price during the period. One should backtest to get how well the
strategy does compared to benchmark.
Result in graph
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10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
That’s it. Happy investment and coding!
. . .
Recommended reading:
Hands-On Machine Learning
Python for Data Analysis: Data Wrangling with Pandas, NumPy, and
IPython
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10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
What Hedge Funds Really Do
. . .
My posts:
SQL vs NoSQL in System Design Interview
Ace the System Design Interview in FAANG
From CRUD web app dev to SDE in voice assistant — My ongoing Journey
to Machine Learning
Full Stack Development Tutorial: Integrate AWS Lambda Serverless Service
into Angular SPA
Full Stack Development Tutorial: Serving Trading Data with Serverless
REST API running on AWS Lambda
Full Stack Development Tutorial: Visualize Trading Data on Angular SPA (1)
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10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
How is Millennials’ Investment choice compared to Motley Fool Stock
Advisor
How I leetcode for 6 months and land a job at Amazon
Trading Strategy: Back testing with Backtrader
Reinforcement Learning: Introduction to Q Learning
Trading Strategy: Technical Analysis with Python TA-Lib
Portfolio Optimization for Minimum Risk with Scipy — Efficient Frontier
Explained
Reducing Risk by Building Portfolio
Trading: Calculate Technical Analysis Indicators with Pandas 🐼
Collect Trading Data with Pandas
Collect Trading Data with Pandas Library 🐼
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10/03/2020 Trading Strategy: Technical Analysis with Python TA-Lib
Trading Data Science Python Data Visualization Investment
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