If you like mean reversion over trend, what are the advantages?

[helpme_please]

There is no right or wrong. Both methods work. One advantage of mean reversion to most people is it is more comfortable psychologically to do so because humans like to buy cheap, as in shopping.

What about the opinions of the elitetraders, especially if your preference is mean reversion?

 

[Tradex]

There is no right or wrong. Both methods work. One advantage of mean reversion to most people is it is more comfortable psychologically to do so because humans like to buy cheap, as in shopping.

What about the opinions of the elitetraders, especially if your preference is mean reversion?

The main advantage with mean reversion systems is the high winning rate, and traders love to win often, even though making money is not about winning frequently.

And even psychologically the idea that "overextended" markets MUST return to "normal" is comforting.

The best mean-reversion markets are the equity indices (S&P500 for example). Forget Forex and interest rates markets, these highly trending markets will crush any mean-reverting strategy.

In any case mean-reversion systems require very strict money management rules, it takes only one black swan event to destroy years of small accumulated profits.

My personal opinion: stick with trend-following techniques, markets do trend so why bet against them?

 

[traderking007]

my opinion is that both are very difficult to make money consistently until you truly understand yourself under pressure and trading.

I have traded both successfully and unsuccessfully and buying cheap is the same in both.

mean reversion unless under the correct circumstances is not a guarantee in many markets. trend following i woukd say is slower and safer if u can find trend but yes there is lots of reversion in indexes and oil. i would call it an arb effect or drift but thats just my own thing

 

[Trader H.C.]

They are like different tools in your toolbox.

Some market works better with mean-reversion while others work well with trend-following.

My point is, use whatever fits the market that you are currently trading.

 

[Tradex]

there is lots of reversion in indexes and oil.

True, that's why these markets respond well to trading systems based on stochastic indicators, like RSI.

 

[gaussian]

It's really the only way to trade and it occurs everywhere. The problem is, for example @Tradex is only applying it to single instruments. That's a mistake.

Mean reversion trading is far better when traded as a spread. Put simply, if two highly correlated instruments (futures, stocks, etc) are suddenly in disagreement you can long one and short the other collecting the spread eventually. Under the assumption the disagreement is a temporary shock (and certainly this would be probable with good data) then the legs of the spread will revert to their long term mean allowing you to close out the position and collect the spread. There's math involved here regarding cointegration arising from a linear combination of time series that is interesting but unimportant in practice. Good enough makes money not mathematical purity.

When you have statistical backing the trading is far more consistent. Yes, you're sitting on your hands forever waiting for a break in correlation, but when it happens the probability of taking home the spread is very high. Professional futures traders have used this technique for decades. There are several other examples of mean reversion - almost anywhere seasonality exists.

 

[Tradex]

then the legs of the spread will revert to their long term mean allowing you to close out the position and collect the spread.

Yes, but even spread trading is not without risk, as a spread can suddenly widen and generate catastrophic losses.

But you've got a point, spreads are usually safe mean-reversion bets, most of the time...

 

[traderking007]

It's really the only way to trade and it occurs everywhere. The problem is, for example @Tradex is only applying it to single instruments. That's a mistake.

Mean reversion trading is far better when traded as a spread. Put simply, if two highly correlated instruments (futures, stocks, etc) are suddenly in disagreement you can long one and short the other collecting the spread eventually. Under the assumption the disagreement is a temporary shock (and certainly this would be probable with good data) then the legs of the spread will revert to their long term mean allowing you to close out the position and collect the spread. There's math involved here regarding cointegration arising from a linear combination of time series that is interesting but unimportant in practice. Good enough makes money not mathematical purity.

When you have statistical backing the trading is far more consistent. Yes, you're sitting on your hands forever waiting for a break in correlation, but when it happens the probability of taking home the spread is very high. Professional futures traders have used this technique for decades. There are several other examples of mean reversion - almost anywhere seasonality exists.

it is getting crowded very crowded and what was once easy pre 2006 is gamed now moslty by hft and many other algos. not the same trade it used to be 15 years ago not even close. i find that the outright mkts lately offer up just as much if not more opportunity oin just buying dips and cutting losses when it doesnt work and keep buying and this has been for 10 years now and it even worked in march so you could say that even out right mkts are reverting these day all teh way back to the mean. not proveable with math like a spread but then again anything you can prove with math so can 10,000 other traders racing to get those contracts. but sure it happens at times.

 

[traderking007]

this little exercise should help put to rest all of those wondering about mean reversion!! lol
which one of these charts is the spread. I am doing the same time frame the same minute bar chart of a very popular spread you tell me which one is out right and which one is a spread. they will be put up 1 anf then 1 same time frame then 1 and then 1 i will be doing 3 different time frames so 6 charts. tell me which one is spread and which one is out right and which one looks easier trade and which one has or shows more mean reversion this is not a trick

 

[traderking007]

same time frame 1a 2a which one shows reversion which one is a spread which one is outright which one is easier to trade ?