TSO Thermostat Strategy

TSO Thermostat Strategy is an indicator that can adapt to the current market conditions by switching from a trend-following mode to a short-term swing mode, thus providing the best possible entry/exit signals in any situation. It is based on the Thermostat Trading Strategy as presented in the book Building Winning Trading Systems with TradeStation by G. Pruitt and J. R. Hill.

Strategy

The Thermostat Strategy uses different entry and exit conditions based on the current situation of the market - trending or swinging. The Choppy Market Index (CMI) is used to detect the current market mode. A CMI of less than 20 indicates a swinging market, whereas a value of 20 and above indicates a trending market.

Swing Mode (white BB)

• A simple visual pattern is used to determine periods where the market has a bullish or bearish bias. The market is expected to behave in a bearish manner if the close price of the last candle is greater than the average of the previous candle's high low and close (also known as key of the day) and vice versa.
• Entry conditions for a bullish market:
• Enter long at whichever is higher:
• the open price of current candle + 50% of the ten-period average true range, or
• the 3-period moving average of the low prices.
• Enter short at whichever is lower:
• the open price of current candle + 75% of the ten-period average true range, or
• the 3-period moving average of the high prices.
• Entry conditions for a bearish market:
• Enter long at whichever is higher:
• the open price of current candle + 75% of the ten-period average true range, or
• the 3-period moving average of the low prices.
• Enter short at whichever is lower:
• the open price of current candle + 50% of the ten-period average true range, or
• the 3-period moving average of the high prices.
• Exit conditions:
• A signal for entry in the opposite direction in swing mode.
• Take Profit and Stop Loss are placed at ± 3 * (10-period Average True Range)

Trend Mode (purple BB)