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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install scipywhen you create a free Medium account.

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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')
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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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