3/4/2019 Trading Strategy: Technical Analysis with Python TA-Lib

Trading Strategy: Technical Analysis

with Python TA-Lib
Kyle Li Follow
May 14, 2018 · 4 min read

Photo by Vladimir Solomyani on Unsplash

In nance, a trading strategy is a xed plan that is designed to achieve a

pro table return by going long or short in markets. The main reasons that
a properly researched trading strategy helps are its veri ability,
quanti ability, consistency, and objectivity.

For every trading strategy one needs to de ne assets to trade, entry/exit

points and money management rules. Bad money management can make
a potentially pro table strategy unpro table.

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3/4/2019 Trading Strategy: Technical Analysis with Python TA-Lib

— 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 pro table 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 how to use TA-Lib to compute technical indicators and
build a 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
pip install scipy
pip install cython

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3/4/2019 Trading Strategy: Technical Analysis with Python TA-Lib

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

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

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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)

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')
ax2.plot(index, price['BB_low'], label='BB_low')
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()

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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

That’s it. Happy investment and coding!

. . .

My other posts:

Trading Strategy: Backtest with Backtrader

Reinforcement Learning: Introduction to Q Learning

Portfolio Optimization for Minimum Risk with Scipy — E cient

Frontier Explained

Reducing Risk by Building Portfolio

Trading: Calculate Technical Analysis Indicators with Pandas 🐼

Collect Trading Data with Pandas Library 🐼

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