managing-apps/docs/VolatilityControlledTradingScenario.md

Volatility-Controlled Trading Scenario

Overview

This scenario combines the STCStrategy (Signal) with the StDevContext (Context) to create a sophisticated trading system that identifies trend reversals while respecting market volatility conditions.

Strategy Components

STCStrategy (Signal Type)

• Purpose: Detects trend reversals using Schaff Trend Cycle indicator
• Signals:
  • Long when STC crosses above 25 (oversold recovery)
  • Short when STC crosses below 75 (overbought decline)
• Confidence: Medium for all signals

StDevContext (Context Type)

• Purpose: Evaluates market volatility to determine trading conditions
• Z-Score Ranges:
  • |Z| ≤ 0.5: High Confidence - Very stable conditions, ideal for trading
  • 0.5 < |Z| ≤ 1.0: Medium Confidence - Normal volatility, good for trading
  • 1.0 < |Z| ≤ 1.5: Low Confidence - Elevated volatility, trade with caution
  • |Z| > 1.5: No Confidence - High volatility, avoid trading

Implementation

Basic Setup

// Initialize strategies
var stcStrategy = new STCStrategy(
    name: "STC Reversal",
    cyclePeriods: 10,    // Cycle length for STC calculation
    fastPeriods: 12,     // Fast EMA period
    slowPeriods: 26      // Slow EMA period
);

var volatilityFilter = new StDevContext(
    name: "Volatility Filter",
    period: 20           // Period for standard deviation calculation
);

// Set up strategies
var strategies = new HashSet<IStrategy> { stcStrategy, volatilityFilter };

Configuration Options

// Conservative configuration (safer trading)
var conservativeConfig = new StrategyComboConfig
{
    MinimumContextConfidence = Confidence.High,    // Only trade in very stable conditions
    MinimumConfidence = Confidence.Medium,         // Only trade medium+ confidence signals
    AllowSignalTrendOverride = true               // Allow reversal signals
};

// Aggressive configuration (more trading opportunities)
var aggressiveConfig = new StrategyComboConfig
{
    MinimumContextConfidence = Confidence.Low,     // Trade in elevated volatility
    MinimumConfidence = Confidence.Low,            // Accept lower confidence signals
    AllowSignalTrendOverride = true
};

// Balanced configuration (recommended starting point)
var balancedConfig = new StrategyComboConfig
{
    MinimumContextConfidence = Confidence.Medium,  // Require normal volatility conditions
    MinimumConfidence = Confidence.Medium,         // Standard confidence requirements
    AllowSignalTrendOverride = true               // Allow trend reversals
};

Trading Logic

public Signal GetTradingSignal(HashSet<Candle> candles, StrategyComboConfig config)
{
    // Update strategies with latest candle data
    foreach (var strategy in strategies)
    {
        strategy.UpdateCandles(candles);
    }

    // Get combined signal
    var signal = TradingBox.GetSignal(
        candles,
        strategies,
        new HashSet<Signal>(), // Previous signals
        config,
        loopbackPeriod: 1      // Check only latest candle
    );

    return signal;
}

Complete Example

public class VolatilityControlledTradingBot
{
    private readonly STCStrategy _stcStrategy;
    private readonly StDevContext _volatilityFilter;
    private readonly StrategyComboConfig _config;

    public VolatilityControlledTradingBot()
    {
        _stcStrategy = new STCStrategy("STC Reversal", 10, 12, 26);
        _volatilityFilter = new StDevContext("Volatility Filter", 20);
        
        _config = new StrategyComboConfig
        {
            MinimumContextConfidence = Confidence.Medium,
            MinimumConfidence = Confidence.Medium,
            AllowSignalTrendOverride = true
        };
    }

    public async Task<Signal> AnalyzeMarket(List<Candle> candles)
    {
        // Ensure we have enough data
        if (candles.Count < 50) // Need sufficient history for both strategies
            return null;

        var strategies = new HashSet<IStrategy> { _stcStrategy, _volatilityFilter };
        
        // Update strategies
        foreach (var strategy in strategies)
        {
            strategy.UpdateCandles(candles.ToHashSet());
        }

        // Get trading signal
        var signal = TradingBox.GetSignal(
            candles.ToHashSet(),
            strategies,
            new HashSet<Signal>(),
            _config
        );

        // Log decision process
        if (signal != null)
        {
            Console.WriteLine($"Trade Signal Generated:");
            Console.WriteLine($"  Direction: {signal.Direction}");
            Console.WriteLine($"  Confidence: {signal.Confidence}");
            Console.WriteLine($"  Date: {signal.Date}");
        }
        else
        {
            Console.WriteLine("No trade signal - conditions not met");
        }

        return signal;
    }
}

Loopback Period Recommendations

For this Scenario:

• Loopback Period: 1-3 candles
  • STC reversals are typically captured immediately
  • Volatility context is current market condition
  • Short loopback prevents stale signals

Considerations:

• Market Timeframe:
  • 5m-15m charts: Use loopback = 1
  • 1h-4h charts: Use loopback = 2-3
  • Daily charts: Use loopback = 1-2

Expected Behavior

High Volatility Conditions (Z-Score > 1.5)

• StDevContext returns Confidence.None
• No trades executed regardless of STC signals
• Protects against whipsaw movements

Normal Volatility Conditions (|Z-Score| ≤ 1.0)

• StDevContext returns Confidence.Medium or Confidence.High
• STC signals are evaluated normally
• Trades executed when STC crosses thresholds

Low Volatility Conditions (|Z-Score| ≤ 0.5)

• StDevContext returns Confidence.High
• Ideal conditions for trend reversal trading
• Higher probability of successful STC signals

Performance Tuning

STC Parameters:

• cyclePeriods: 8-15 (shorter = more sensitive)
• fastPeriods: 9-15 (standard EMA settings)
• slowPeriods: 21-30 (standard EMA settings)

Volatility Parameters:

• period: 14-21 (standard volatility lookback)
• Z-Score thresholds: Adjust based on asset volatility characteristics

Risk Management

1. Position Sizing: Reduce size when volatility confidence is low
2. Stop Losses: Tighter stops in high volatility periods
3. Take Profits: Quicker profit-taking when volatility increases
4. Market Hours: Consider time-based context strategies for optimal trading windows

Backtesting Recommendations

1. Test different volatility thresholds on historical data
2. Evaluate performance across various market conditions
3. Monitor the distribution of context confidence levels
4. Analyze signal quality vs. market volatility correlation
5. Compare performance with and without volatility filtering