Qstick Indicator Trading Strategy (Backtest & Performance Analysis)

There are many momentum and trend indicators out there, but the Qstick indicator is not one that shows up very often. What is the Qstick indicator

The Qstick indicator is a technical indicator that consists of two moving averages and it is used to identify trends. it can be used to create a Qstick Indicator trading strategy.

Is the Qstick indicator useful? Can we build a profitable trading strategy with it?

In this article, we are going to look at what the Qstick indicator is, how to calculate it, and backtest two trading strategies using different types of moving averages.

What is the Qstick indicator?

The Qstick indicator is a technical analysis indicator developed to identify trends in price charts. It was created by Tushar Chande, a famous market technician that has made several other indicators:

The Qstick indicator is simply the difference between the simple or exponential moving average of the difference between the open and closing prices. We have no idea why it’s called Qstick, though.

A Qstick value greater than zero means that most of the last ‘n’ days have been up, indicating that buying pressure has increased. On the contrary, if the Qstick value is below zero, the last ‘n’ days have been down and the trend is negative.

How to calculate the Qstick indicator

The Qstick indicator is very easy to calculate:

  • QSI = SMA or EMA of (Close – Open)

The only calculation we need to do is subtract the open simple moving average from the open moving average for each period. Please read here for what is a simple moving average?

However, we need to decide on how many periods to use in the EMA or SMA. The more periods used, the smoother the indicator and the fewer the signals, better for identifying the overall trend. There is not a defined or commonly used period for the indicator, as there is for example with the RSI(14 days).

After this, it is also necessary to calculate a signal line to generate trading signals. The signal line can be a simple moving average or exponential moving average of the Qstick indicator. Nevertheless, the number of periods must be lower than the one used to calculate the Qstick.

Qstick indicator strategy – trading rules

For the backtest we are going to use the 100-day simple moving average of the daily open and close prices of the security. For the signal line we will calculate the 50-day moving average of the Qstick indicator. Having this in mind, the trading rules of the system are pretty easy:

  • We buy when the Qstick indicator crosses above the signal line
  • We sell and move to cash when the signal line crosses under the Qstick indicator

Qstick indicator strategy – backtest

We backtested the strategy in the ETF version of the S&P 500, SPY. The data is not adjusted for dividends and splits. Here are the compounded returns:

Qstick Indicator strategy

The equity curve looks very good! Here are some metrics and statistics about the performance of the strategy:

  • CAGR is 6.64% (buy and hold 7.65%)
  • Time spent in the market is 51.11%
  • Risk-adjusted return is 12.99% (CAGR divided by time spent in the market)
  • Maximum drawdown is 41.41% (56.47%)

The indicator performs relatively well on its own. Of course, you can always change the parameters and get better or worse returns.

But would the performance significantly change if we use the exponential moving average instead of the simple moving average? We backtest the exact same strategy with this change and here are the results:

Qstick indicator strategy backtest and performance

As you can see, in this case, the performance is quite similar but also slightly better. CAGR is 6.98% and time spent in the market is almost identical. The maximum drawdown of the exponential moving average strategy is also smaller at 35.29%.

Qstick indicator strategy – conclusion

To sum up, the Qstick indicator is a great trend indicator that performs relatively well on its own, either using the simple moving average or the exponential moving average.

However, its true potential may be bigger if we pair it with another indicator.

FAQ:

What is the Qstick indicator, and how does it differ from other momentum and trend indicators?

The Qstick indicator, developed by Tushar Chande, is a unique technical analysis indicator used to identify trends in price charts. It involves the difference between the simple or exponential moving average of the difference between the open and closing prices. Unlike other indicators, the Qstick focuses on buying and selling pressure, providing insights into market trends.

How is the Qstick indicator calculated, and what does a positive or negative value indicate?

The Qstick indicator is calculated as the simple or exponential moving average of (Close – Open). A positive Qstick value suggests that most of the recent days have been up, indicating increased buying pressure. Conversely, a negative value indicates that the recent days have been down, signaling a negative trend.

Can a profitable trading strategy be built using the Qstick indicator?

Yes, a profitable trading strategy can be developed using the Qstick indicator. The article discusses a specific strategy involving the 100-day simple moving average of daily open and close prices, combined with a 50-day moving average of the Qstick indicator. The backtested results show positive returns, but users may experiment with different parameters.

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