Constructing a StochRSI and Bollinger mechanical system

Three required parts of the procedure

A mechanical trading system is constructed as one procedure with three required parts: entry and exit signals, a stop plan, and a capital-allocation rule. Those parts turn rule inputs, market state, and execution constraints into entry, exit, or abstention signals over a defined holding period.

The archive presents the resulting script as a starting mechanical procedure, not a finished product. Later refinements include adjustable lookbacks and self-adapting thresholds.

First encode an independent confirmation pair

StochRSI and Bollinger Bands are paired because one is range-based momentum and the other is a statistical envelope. They are not reverse calculations of the same range formula, so one reading can corroborate the other.

The relative strength index is a bounded oscillator of ordered closes. It can be restated as StochRSI by measuring where current RSI sits inside its own recent high-low range. On a 14-period window, StochRSI is RSI minus its lookback low, divided by the lookback RSI range, which makes it reach extremes faster than raw RSI.

Bollinger Bands are a statistical envelope around a moving average that locates price against a volatility-scaled upper, mid, and lower band.

A long setup is encoded as price tagging the lower 20-day, two-standard-deviation band, then closing back above that band while StochRSI rises to 0.4.

Then add market-state filters

Volatility regime and volume state are construction inputs. Shorter StochRSI lookbacks fit quieter price regimes. Low-volume sideways stretches are treated as random and better skipped.

The system is specified for swing holding periods on names averaging more than 500,000 shares a day, not for noise-scale scalping.

Editorial: an in-gear price move that rises on expanding volume or falls on contracting volume is a market-state filter rather than a signal by itself. That reading belongs with the volume-state skip, not with the entry rule.

Then decide what excursion data should change

An encoded exit after an upper-band tag is a later close back through the Bollinger midline once momentum has faded.

Excursion charts are used as a construction check. Many losers first showed open profit, so a trailing stop is a candidate alternative to further exit-rule encoding. Maximum favorable excursion records the best intra-trade open profit before a close. Maximum adverse excursion records the worst intra-trade drawdown before a close. Together they inspect stop and exit logic and whether open gains are given back.

Capital allocation is part of the procedure. At most one-tenth of current capital is assigned to any single position.