why people bad mouth mean reversion strategies?

[QuikrRetirement]

Quote from Retief:

Give the OP a break. I don't think English is his native language and not everyone is a big swinging dick. The beginning of wisdom is kindness.

As SomeYoungGuy said above "Who is Bad Mouthing it?"

It is not an english problem, and this OP has a history of starting semi-shock threads.

 

[jack hershey]

Quote from filter_sweep:

+2

This technique can be very powerful when applied to day trading as well, look for mean-reversion setups on 3 and 5 minute charts during pullbacks within trends on the 1 hour and daily charts.

This takes a lot of discipline and patience though, and I think that's where a lot of people (myslef included) tend to screw it up. The key to a good mean reversion setup is to, as Mr. Rogers would say, wait long enough for the money to just be sitting there in the corner and all you have to do is go pick it up. It's too easy to be casual and lazy and start building a position after the market's made a couple legs, without considering the move into the higher-frame context. If you try to mean-revert at the moment the higher-frame trend is getting taken behind the woodshed (in other words, ceasing to be a trend), you've got a good chance of getting chopped up, seeing your max loss, or a blow-up, depending on your money management strategy.

You did a good job ID'ing some of the flaws in retief's approaches. Covering flaws with money management tends to keep a person moving away from optimization instead of gaining effectivenss and efficiency. Too bad. Big D has the same troubles as retief from what he says. That trip from a spread of 30 to 300 looks kinda like a lot of fun.

 

[maxpi]

mean reversion can be split into two parts. Mean reversion joining the trend is "buy the dips", mean reversion counter trend is, well... counter trend...

 

[NoDoji]

Quote from mizhael:

Interesting, could you please elaborate on "I prefer to play these as soon as price stalls and with a tight stop; others will average as price continues to move against them, looking for the eventual reversion to mean. "?

Thanks!

I think of mean reversion as a counter-trend strategy. With-trend trading involves either trading breakouts in the direction of the trend, or buying/selling pullbacks in the trend for the next move up/down.

When a trend is making a 3rd push, trend followers are going to look for an exhaustion point to take off some or all of the trade. Counter-trend traders are licking their chops because retraces off a 3rd push can be strong and often set up a trend reversal.

I use a 5-min chart. When I see a 3rd push in progress, I watch for a second price bar to extend and the moment price on my DOM pauses and pulls back a few ticks, I may jump into a counter-trend position with my stop at the new high/low.

This way my risk is very small, and if stopped out, I watch for price to stall again and try again.

Others playing this strategy start scaling into a full-size position during the strong move (hopefully waiting for at least a second strong bar starting with the breakout bar). If you do it this way and have well-planned entry intervals, a max position size, and a firm price level at which you will bail, it can work just as well, but the potential loss is higher.

I'm a day trader using 5-min charts, but this strategy works in all time frames.

I used this strategy today on my last trade in crude oil just before the NYMEX close.

At 2:10pm, price was in the process of a 3rd push up from the 12:45pm ET pivot low. The 2:15pm bar was the breakout bar and the 2:20pm bar was green and broke through the 2:15pm bar's high. The breakout tested a next level and stalled. Price pulled back and I shorted the exhaustion pullback.

Because I was trading with the new momentum (instead of having faded the breakout as it ran against me), the trade was almost immediately 11 ticks profitable before I even had time to place my stop, so I placed my stop at break even and took profits on the way down to the 20-bar moving average (a standard initial target for counter-trend trades).

 

[jack hershey]

Quote from NoDoji:

I think of mean reversion as a counter-trend strategy. With-trend trading involves either trading breakouts in the direction of the trend, or buying/selling pullbacks in the trend for the next move up/down.

When a trend is making a 3rd push, trend followers are going to look for an exhaustion point to take off some or all of the trade. Counter-trend traders are licking their chops because retraces off a 3rd push can be strong and often set up a trend reversal.

I use a 5-min chart. When I see a 3rd push in progress, I watch for a second price bar to extend and the moment price on my DOM pauses and pulls back a few ticks, I may jump into a counter-trend position with my stop at the new high/low.

This way my risk is very small, and if stopped out, I watch for price to stall again and try again.

Others playing this strategy start scaling into a full-size position during the strong move (hopefully waiting for at least a second strong bar starting with the breakout bar). If you do it this way and have well-planned entry intervals, a max position size, and a firm price level at which you will bail, it can work just as well, but the potential loss is higher.

I'm a day trader using 5-min charts, but this strategy works in all time frames.

I used this strategy today on my last trade in crude oil just before the NYMEX close.

At 2:10pm, price was in the process of a 3rd push up from the 12:45pm ET pivot low. The 2:15pm bar was the breakout bar and the 2:20pm bar was green and broke through the 2:15pm bar's high. The breakout tested a next level and stalled. Price pulled back and I shorted the exhaustion pullback.

Because I was trading with the new momentum (instead of having faded the breakout as it ran against me), the trade was almost immediately 11 ticks profitable before I even had time to place my stop, so I placed my stop at break even and took profits on the way down to the 20-bar moving average (a standard initial target for counter-trend trades).

SUPER!!!!!!!

 

[1a2b3cppp]

People lose money in mean reversion because it usually turns into martingale.

Anyway, mean reversion is pretty similar to counter trend trading.

Why not do the opposite? Why not just buy an option straddle when price gets back to the mean. It's gotta go SOMEWHERE then, right? lol.

 

[athlonmank8]

Because most people don't want to stand in front of a freight train.

Of the people that do, many people don't know how to get out of the way.

 

[athlonmank8]

Quote from NoDoji:

I think of mean reversion as a counter-trend strategy. With-trend trading involves either trading breakouts in the direction of the trend, or buying/selling pullbacks in the trend for the next move up/down.

When a trend is making a 3rd push, trend followers are going to look for an exhaustion point to take off some or all of the trade. Counter-trend traders are licking their chops because retraces off a 3rd push can be strong and often set up a trend reversal.

I use a 5-min chart. When I see a 3rd push in progress, I watch for a second price bar to extend and the moment price on my DOM pauses and pulls back a few ticks, I may jump into a counter-trend position with my stop at the new high/low.

This way my risk is very small, and if stopped out, I watch for price to stall again and try again.

Others playing this strategy start scaling into a full-size position during the strong move (hopefully waiting for at least a second strong bar starting with the breakout bar). If you do it this way and have well-planned entry intervals, a max position size, and a firm price level at which you will bail, it can work just as well, but the potential loss is higher.

I'm a day trader using 5-min charts, but this strategy works in all time frames.

I used this strategy today on my last trade in crude oil just before the NYMEX close.

At 2:10pm, price was in the process of a 3rd push up from the 12:45pm ET pivot low. The 2:15pm bar was the breakout bar and the 2:20pm bar was green and broke through the 2:15pm bar's high. The breakout tested a next level and stalled. Price pulled back and I shorted the exhaustion pullback.

Because I was trading with the new momentum (instead of having faded the breakout as it ran against me), the trade was almost immediately 11 ticks profitable before I even had time to place my stop, so I placed my stop at break even and took profits on the way down to the 20-bar moving average (a standard initial target for counter-trend trades).

I love reading your posts.

 

[bone]

A spread position these days has to be specially constructed and modeled for mean reversion tendencies - any stat arb trader would agree. Even highly correlated and fundamentally linked spreads seem to trend more than they mean revert, and this has been the case for a few years now. From the mid 1990's until about 2005 I traded alot of volatility channels, some specialized oscillators and I kept spreadsheets detailing one, two, and three-sigma trading range levels; the models I use now are completely different.

 

[NoDoji]

Quote from athlonmank8:

I love reading your posts.

Thanks!

I'd like to add something to this:

"I use a 5-min chart. When I see a 3rd push in progress, I watch for a second price bar to extend and the moment price on my DOM pauses and pulls back a few ticks, I may jump into a counter-trend position with my stop at the new high/low.

This way my risk is very small, and if stopped out, I watch for price to stall again and try again."

Be careful not to get distracted or frustrated if stopped out a couple times. You have to stay very focused and work each bar. I had one of these going not long ago, two small stop outs, then took a little break instead of taking the 3rd stall and missed a HUGE reversion move