Mean-reversion strategy
Rolf Technical Analysis 3 Comments 8, Views. Mean reversion trading is often referred to as counter-trend or reversal trading which all, more or less, describe the same type of trading style.
A mean reversion trader looks for price that has moved away significantly from its mean average price; the mean reversion trader looks for unsustainable trends. Although most people prefer the trend-following approach, I never felt comfortable with the general trend-trading mindset and I started looking at mean reversion trading very early on. In the following article, we take a look at mean reversion trading, what mean-reversion most overlooked aspects are and which challenges a mean reversion trader has to deal with.
As said above, a mean reversion trader is looking for opportunities where price has moved away from its mean or average price significantly. Usually, the mean price is calculated by using a moving average and applying it to the charts. As you can see, price frequently pulls away from the blue moving average and then snaps right back to it. If this sounds too good to be true, mean-reversion is.
Of course, those hindsight-charts with the perfect trades only tell half of the story. But this time, I marked all the pullbacks that did not strategy it all the way to the moving average. Therefore, mean reversion mean-reversion is more than just trading back to the moving average and it requires a very strict entry management, risk management approach strategy an emotionally stable character to avoid things such as revenge-trading or over-trading.
Mean-reversion the following, we take a look at the most commonly overlooked aspects that make mean reversion trading harder than it seems at first glance.
Although this seems very obvious, most traders never think about the implications their choice of the moving average has on their trading. This time we applied two different moving averages: The differences may seem insignificant, but for a mean reversion trader, choosing the correct moving average is one of the most important decisions and it also is a strategy personal and individual one. These are the main differences between the two types of moving averages:. As you can see, strategy is not judgmental and there mean-reversion no right or wrong when it comes to choosing a moving average for your trading.
Instead, I want to highlight the fact that the choice of the moving average has wide-ranging consequences on your trading style and mean-reversion has to be made based on personal preferences and character styles. The second most overlooked and undervalued mean-reversion is that sometimes the reversal happens very slowly and in the meantime, the moving average moves closer towards price and, thus, reduces the reward: The screenshot below illustrates the point.
A trader then has to decide if he leaves his initial take profit order unchanged or if he moves his take profit along with mean-reversion moving average. Picking tops and bottoms can be a very dangerous thing to do in trading and amateur traders, especially, often engage in such trading behavior because they underestimate the fact mean-reversion price can keep on trending much longer than they think.
Although this is true for all types of trading, it is especially important for mean reversion traders. It can take very long until a trading signal occurs and very often you will not see all your entry criteria, but still price goes back to strategy moving average. Staying away from jumping in late and not trying strategy chase a trade is very important. Other times, all your criteria line up, but price still keeps on going against you.
Not cutting your loss and adding to a loser is what mean reversion traders often do because they believe that the reversal is overdue. Overbought and oversold scenarios are often used as reasons to enter counter-trend trades, whereas overbought prices often just signal a very strong strategy — not an overdue reversal. All these points highlight the complexity and the challenges for mean reversion trading and it becomes obvious why this style may not be suited for amateur traders, or traders who are still struggling with the mental aspect of trading.
However, not all traders feel comfortable trading with a trend following strategy; it is therefore important that you audit yourself to find your perfect fit. Great article, thank you very much. I find myself leaning more and more towards the mean reversion method without even realising it. So this has helped clarify a few things. I would love to hear mean-reversion about your mindset and methods you use to find your correct trading niche. Your email address will not be published.
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An Introduction To Mean Reversion Trading And The 4 Biggest Challenges Rolf Technical Analysis 3 Comments 8, Views. Contents in this article Mean reversion trading — a mean-reversion introduction The 4 main challenges of mean reversion trading 1 How do you determine the mean? What the Stochastic indicator really does. Forex Trading Academy Forex price action course Private forum Weekly setups Strategy Here. Gordon July 26, at 8: Strategy a Reply Cancel reply Your email address will not be published.
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Human character is dominated by both forces, but it is important to identify which of these forces plays a dominant role.
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The college or university that they are attending or planning to attend.