Construct an RSI based signal

It's time to implement your first mean-reversion strategy. Mean reversion trading uses signals to detect market imbalance, and takes long positions in an oversold market and short positions in an overbought market.

First, you will use the RSI indicator to gauge market conditions and construct the signal. If the RSI value drops below 30, you will enter long positions. If the RSI value rises above 70, you will enter short positions. If the RSI value is in between 30 and 70, you will take no positions.

The RSI indicator has been pre-calculated and saved in stock_rsi. The historical price data of the Google stock has been preloaded in price_data. In addition, the bt package has been imported for you.

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Financial Trading in Python

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# Construct the signal
signal[____ > ____] = -1
signal[____ < ____] = 1
signal[(____ <= ____) & (____ >= ____)] = 0

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Financial Trading in Python

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What is financial trading, why do people trade, and what’s the difference between technical trading and value investing? This chapter answers all these questions and more. You’ll also learn useful tools to explore trading data, generate plots, and how to implement and backtest a simple trading strategy in Python.

Exercise 1: What is financial trading Exercise 2: The concept of trading Exercise 3: Plot a time series line chart Exercise 4: Plot a candlestick chart Exercise 5: Getting familiar with your trading data Exercise 6: Resample the data Exercise 7: Plot a return histogram Exercise 8: Calculate and plot SMAs Exercise 9: Financial trading with bt Exercise 10: The bt process Exercise 11: Define and backtest a simple strategy

Let's dive into the world of technical indicators—a useful tool for constructing trading signals and building strategies. You’ll get familiar with the three main indicator groups, including moving averages, ADX, RSI, and Bollinger Bands. By the end of this chapter, you’ll be able to calculate, plot, and understand the implications of indicators in Python.

Exercise 1: Trend indicator MAs Exercise 2: Calculate and plot two EMAs Exercise 3: SMA vs. EMA Exercise 4: Strength indicator: ADX Exercise 5: Understand the ADX Exercise 6: Calculate the ADX Exercise 7: Visualize the ADX Exercise 8: Momentum indicator: RSI Exercise 9: Understand the RSI Exercise 10: Calculate the RSI Exercise 11: Visualize the RSI Exercise 12: Volatility indicator: Bollinger Bands Exercise 13: Understand Bollinger Bands Exercise 14: Implement Bollinger Bands

You’re now ready to construct signals and use them to build trading strategies. You’ll get to know the two main styles of trading strategies: trend following and mean reversion. Working with real-life stock data, you’ll gain hands-on experience in implementing and backtesting these strategies and become more familiar with the concepts of strategy optimization and benchmarking.

Exercise 1: Trading signals Exercise 2: Understand trading signals Exercise 3: Build an SMA-based signal strategy Exercise 4: Build an EMA-based signal strategy Exercise 5: Trend-following strategies Exercise 6: Construct an EMA crossover signal Exercise 7: Build and backtest a trend-following strategy Exercise 8: Mean reversion strategy Exercise 9: Match the signals with the strategies Exercise 10: Construct an RSI based signal

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Exercise 11: Build and backtest a mean reversion strategy Exercise 12: Strategy optimization and benchmarking Exercise 13: Conduct a strategy optimization Exercise 14: Perform a strategy benchmarking

How is your trading strategy performing? Now it’s time to take a look at the detailed statistics of the strategy backtest result. You’ll gain knowledge of useful performance metrics, such as returns, drawdowns, Calmar ratio, Sharpe ratio, and Sortino ratio. You’ll then tie it all together by learning how to obtain these ratios from the backtest results and evaluate the strategy performance on a risk-adjusted basis.

Exercise 1: Strategy return analysis Exercise 2: Review return results of a backtest Exercise 3: Plot return histograms of a backtest Exercise 4: Compare return results of multiple strategies Exercise 5: Drawdown Exercise 6: Review performance with drawdowns Exercise 7: Calculate and review the Calmar ratio Exercise 8: Sharpe ratio and Sortino ratio Exercise 9: Evaluate strategy performance by Sharpe ratio Exercise 10: Evaluate strategy performance by Sortino ratio Exercise 11: Congratulations!