Mean reversion. To be, or not to be ...

A

abattia

... that is the question.

I have an automated, intraday, mean-reversion strategy (for US stocks) which works best when the market chops and ranges up and down with medium amplitude swings (i.e. of the order of 30/60 minute ATR).

If I can find one, I want to add another filter that will switch off the strategy when the probability has increased that price will break from the range.

Any suggestions for ideas I could explore?

Any comments on the proposed approach?

Thanks.
 
Quote from abattia:

If I can find one, I want to add another filter that will switch off the strategy when the probability has increased that price will break from the range.
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Why switch off? This is when you can make most of the money. This will also be the filter. Switch to position trading when there is a break-out.
 
Quote from intradaybill:

Why switch off? This is when you can make most of the money. This will also be the filter. Switch to position trading when there is a break-out.
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Thanks, intradaybill

Agreed; other strategies need to take over when there is a break-out.

But are you saying "don't worry about trying to switch off the mean reverting strategy in advance; if you get 'hit' with a losing trade just exit at your stop; and then aim to make it up (plus some) on the position trades" ...?
 
Quote from abattia:

Thanks, intradaybill

Agreed; other strategies need to take over when there is a break-out.

But are you saying "don't worry about trying to switch off the mean reverting strategy in advance; if you get 'hit' with a losing trade just exit at your stop; and then aim to make it up (plus some) on the position trades" ...?
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More or less. But this leaves mean-reversion out if done properly at least in the daily time frame. I am working on a dual time frame method now which uses 30 minute bars for mean reversion and daily bars for position trading/filter.
 
I'm in the middle of reading "Trading Regime Analysis" by Gunn, and I've gotten a few ideas so far (untested) from it about what can help predict a ranging situation:

oscillator divergence
large round numbers
test of major support or resistance
a trend that is corrective on a higher time frame may have more ranging behavior
bollinger band contraction/expansion cycles
downsloping ADX
ATR not at either extreme
larry williams percentR indicator
end of a clearly impulsive elliot wave sequence

He also suggested using triangle patterns and squeeze setups to anticipate trending.

And a few untested ideas of my own:

volume climaxes after a strong move often precede ranging periods

High Volume Nodes or vpocs on a volume profile (either long term composite or daily profile) seem to lead to ranging behavior as price rotates around them.

large cumulative delta divergence over a period of time

And of course there are GARCH, EGARCH, etc which I don't know a lot about but seem to be popular. I think for predicing ranging behavior, though, you'd want to try to use them to predict the ATR rather than the Volatility.




Quote from abattia:

... that is the question.

I have an automated, intraday, mean-reversion strategy (for US stocks) which works best when the market chops and ranges up and down with medium amplitude swings (i.e. of the order of 30/60 minute ATR).

If I can find one, I want to add another filter that will switch off the strategy when the probability has increased that price will break from the range.

Any suggestions for ideas I could explore?

Any comments on the proposed approach?

Thanks.
More...
 
Quote from abattia:

... that is the question.

I have an automated, intraday, mean-reversion strategy (for US stocks) which works best when the market chops and ranges up and down with medium amplitude swings (i.e. of the order of 30/60 minute ATR).

If I can find one, I want to add another filter that will switch off the strategy when the probability has increased that price will break from the range.

Any suggestions for ideas I could explore?

Any comments on the proposed approach?

Thanks.
More...

What's a typical mean-reverting strategy? Anybody could elaborate a bit?

Thanks!
 
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