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RSI (Relative Strength Index)RSI = Relative Strength Index Is fluctuates between 0 and 100 • A momentum Oscillator • Increasing RSI when: Average gains are greater than average losses = Bullish • Decreasing RSI when: Average gains are less than average losses = Bearish How to use: 1. Trend recognition: trading in the direction of the trend 1.1 Above 50: Uptrend 1.2 Below 50: Downtrend 2 Overbought and oversold entry signals. 2.1 In an uptrend look for oversold areas and open a long trade after the pullback above 30. 2.2 In a downtrend look for overbought areas and open a short trade after the pullback below 70.
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by apadanaforex
(Review) Definition trend and change of trend ( Trend reversal)(Review) Definition trend and change of trend ( Trend reversal) EX: Discussion: Downtrend - Definition A downtrend comprises a repeating sequence of: 1) A downward extension 2) A swing low 3) An upward pullback 4) A swing high A downtrend ends when price breaks the swing high which leads to the lowest swing low of the trend Uptrend - Definition An uptrend comprises a repeating sequence of: 1) An upward extension 2) A swing high 3) A downward pullback 4) A swing low An uptrend ends when price breaks the swing low which leads to the highest swing high of the trend EX: Prior analysis ( Downtrend) - Countertrend - Reversal trend: - Downtrend forming=> Sell - Continuous downtrend Please support the setup with your likes, comments and by following on TradingView. Thanks
Education
by DatTong
11
(Review) Definition trend and change of trend ( Trend reversal) (Review) Definition trend and change of trend ( Trend reversal) EX: Discussion: Downtrend - Definition A downtrend comprises a repeating sequence of: 1) A downward extension 2) A swing low 3) An upward pullback 4) A swing high A downtrend ends when price breaks the swing high which leads to the lowest swing low of the trend Uptrend - Definition An uptrend comprises a repeating sequence of: 1) An upward extension 2) A swing high 3) A downward pullback 4) A swing low An uptrend ends when price breaks the swing low which leads to the highest swing high of the trend EX: Prior analysis ( Downtrend) - Countertrend - Reversal trend: - Downtrend forming=> Sell - Continuous downtrend Please support the setup with your likes, comments and by following on TradingView. Thanks
Education
by DatTong
25
How To Pair Currencies Like A Champ | Quick & Accurate🔵 As a forex trader, some of us stick to a pair or two, some of us trade several, and some just scan all of them for the exact setup that they trade in their strategy. Regardless, it’s a forex trader’s duty to have an awareness of how each currency is performing. If GBPJPY is going to rise, it will most likely be due to a combination of the pound gaining strength and the yen getting weaker. Have you ever had the same setup on several EUR pairs, but the one you traded didn’t perform as well as others? It’s most likely because you chose the pair out of the bunch that wasn’t diverging in strength. Before I analyze anything, I assess the strength of each currency first, then I select the best matchups to increase my probability by default. Common techniques I’ve seen traders use to filter pairs: Currency strength indicator Currency heatwave mobile app Looking at DXY, EXY, BXY, CXY, etc. Manually scanning each pair to get a feel for each currency strength None of these are right or wrong, but there is another method that I use, and I will share it in this post. The issues I faced: I use to manually scan each currency pair, but it was too exhausting, by the time I started analyzing charts, my brainpower was weakened. As for the indicator & heatwave, I never personally liked them because I felt like they were too slow, I was always a step behind the big moves. The issue with looking at DXY vs. BXY is the BXY has too much weight related to the dollar, if you look at it you’ll probably see it moves just like GBPUSD. Solution: We need a way to not only analyze each currency but make sure they are equally weighted. I created custom formulas on tradingview to help me read currency strengths faster, and more accurately. How To Do It: If you open a chart on tradingivew, and you go to the top left of your chart where you can search an asset. Not only can you search assets but you can create formulas here, you should be able to see the math symbols. So if we want to create a formula to find the USD strength this is what we can type in: (USDEUR+USDGBP+USDJPY+USDCHF+USDCAD+USDNZD+USDAUD) / 7 *Note: Use the same broker for all of them when you add them to the formula, and make sure they are consistent. The USD is the first one listed on all of them, we need this consistency because we are comparing everything to the USD. At the end of the formula, I divide it by 7 because that will divide the entire formula and show us the average. When you press enter you will now see a chart displayed on your screen, this is displaying how the USD is performing across the board. I have done this for all the top 8 currencies, I have also created one for XAU versus the top 8 so I can see its performance as well. Now let’s say you are a harmonic style trader. This is how you can use it to find the higher probability harmonics (you can do this for other signals too) Example #1: GBPNZD Here’s what the formulas say: Based on this, they are both strong, so there should be some range behavior. Let’s see how GBPNZD actually behaved: Example #2: GBPNZD Let’s say you are a trend trader, here’s what the formula said: Based on this, GBPNZD should rise with strength because of the divergence. How I use this: I use these formulas to find when trends or sentiment switches are occurring. I spend probably 65% of my time analyzing on these 8 charts. It allows you to be one step ahead of everyone else, and to increase your probability. I’ve used it on 5-minute charts, H1, H4, Daily, and Weekly. I’ve had no issues with it for over two years. Of course, I’m not saying throw away the DXY or anything like that, this is simply another tool you can put in your box. I hope you found this valuable, feel free to backtest or tweak it to your liking, if you watched my Sunday outlooks, I go through this process before the week begins, then I do it before each of my trading sessions during the week. Let’s Elevate, Gio P.S. Every week I share a market outlook, educational content and trade ideas, right here on tradingview. Make sure to follow so you don’t miss them! Comment your thoughts below, or if you need help setting it up! Also, if you want to sharpen your psychology check this post I shared monday -> 5 Ways To Enhance Your Trading Psychology
Education
by elevatedinvestor
9
5 Ways To Enhance Your Trading Psychology (Tips)Welcome to mindset Monday, where I will share something trading psychology-related. In this post, I will be breaking down 5 things that have helped my trading psychology over the years. Trading is not only a game of strategy, but there is a level of self-awareness involved as well. The 5 things that have helped me are basic brainwave science, limiting social media, diet, letting go, and having a trading ritual. Let’s discuss them further. 1. Your Brainwaves & Binaural Beats Did you know? When you wake up your brain is in what’s called “Alpha” state? Believe it or not this is actually not ideal for trading. When your brain is in Alpha state, it is actually in a more relaxed mode, Alpha is typically a state someone is in when they meditate or are about to fall asleep. It takes the average person 30-60 minutes after they wake up to transition out of Alpha and into the “Beta” state. Beta waves are what your brain is in when it feels “on.” When you are doing homework, working out, or even at a work, your brain is in Beta. How does this relate to trading? Well, back when I was obsessed with charts (in a dangerous way) I would wake up and just hop on the chart and try to trade. I would literally hop out of bed and look at my laptop. I now allow myself one full hour to transition into Beta before I begin trading, this allows me to operate at full capacity and stay sharp and alert. I also use an app on my phone called binaural beats. The app will actually play Beta waves through headphones, and while your listening to it will help your brain switch into it faster. I recommend looking into binaural beats apps, a quick google search will explain more to you. In trading, it’s important to find as many ways as possible to stay mentally sharp. This is one I use. 2. Limit Social Media I’ve seen it and I’m sure you have, the people on Instagram, Facebook, and other platforms flashing pictures of how many pips they are catching and how they are scaling accounts by 5000% in 8 days. That’s great and all, but this could potentially DESTROY you when you sit down and look at the charts. As humans, we are always comparing ourselves to other people, and when we see someone else doing better we either get down on ourselves, get inspired, or think that we need to do that too, or we aren’t performing up to par. Trading is unlike anything out there. You aren’t competing with anyone, it’s about you and the chart, your mind needs to be clear to tap into your zone. The issue with social media is people get googly-eyed at money and the lavish life but trading is not about that, it’s simply about building habits, when you take your mind off of your execution and systems and you start thinking you need to scale up quicker, you are going to be trading simply off emotion and probably make mistakes. Silencing my social media from flashy traders was one of the best decisions I have ever made. 3. Your Diet What you put into your body can affect your mind greatly. If you eat more whole foods, and get some exercise regularly these actions lead to a good feeling. Your brain will release more serotonin, this will help increase your mood. When you feel good about yourself. You usually have more confidence, and when you have more confidence, that is going to come through in your trading and your life, you’ll feel more confident in your intuition and decisiveness, and as traders, all we do every day is make decisions! 4. Let Go Let go of everything, let go of yesterday’s bad trade, let go of an argument you had with a loved one, try and let go of any stress you may feel. Meditate for 15 minutes if you need to. Beat the crap out of a pillow. Release that energy because if you don’t you may exert it onto the chart. Every trade is a brand new trade, the market doesn’t care about your problems, it will tick on with or without us. I have tried yelling at EURUSD when it stops me out, and I found that I never get a response from my computer screen. If you’re having a bad day, just step away and get a fresh start tomorrow. 5. Consistent Ritual Man, I can’t emphasize this enough, when you have a strategy, the name of the game just becomes execution really. You need to train your brain/subconscious to simply repeat your strategy over and over. In my opinion, the best way to do this is to trade from the same location. If you trade at home, do it in the same spot every time. Do something that puts your brain into “trading mode,” for me, it is making a cup of tea. I wake up, eat food, and once that cup of tea gets made, I started thinking “it’s game time.” Did you know that Tom Brady takes a nap two hours before every game? This is an example of his ritual, yours can be anything you want, affirmations, visualizing, anything you feel you can do before sitting down that will trigger your “trader state of mind.” I’m not a psychologist, but I hope this article gave you value, or maybe just gave you a break from reading posts about charts and setups. Just sharing my experiences. Let’s Elevate, Gio P.S. Every week I share a forex outlook, educational content and trade ideas, right here on tradingview. Make sure to follow so you don’t miss them!
Education
by elevatedinvestor
25
📚 The Beauty of Combining Technical & Fundamental Analysis 📚What is Fundamental Analysis? Fundamental analysis is a way of looking at the forex market by analysing economic, social, and political forces that may affect currency prices. The idea behind this type of analysis is that if a country's current or future economic outlook is good, its currency should strengthen (Baby Pips - www.babypips.com) What is Technical Analysis? Technical analysis is the study of historical price action in order to identify patterns and determine probabilities of future movements in the market through the use of technical studies, indicators, and other analysis tools (Forex.com www.forex.com) Technical analysts look for similar patterns that have formed in the past and will form trade ideas believing that price could possibly act the same way that it did before. From the chart above, you can see how key fundamental news created incredible volatility in the market but the underlying technical analysis was still intact. From this, we can gather that although fundamental analysis is important, technical analysis is just as important. See charts below to identify how we could have traded the key fundamental moments over the past few years. See links below for more trade ideas and in-depth analysis!
Education
by WicktatorFX
8
📚 The Beauty of Combining Technical & Fundamental Analysis 📚 What is Fundamental Analysis? Fundamental analysis is a way of looking at the forex market by analysing economic, social, and political forces that may affect currency prices. The idea behind this type of analysis is that if a country's current or future economic outlook is good, its currency should strengthen (Baby Pips - www.babypips.com) What is Technical Analysis? Technical analysis is the study of historical price action in order to identify patterns and determine probabilities of future movements in the market through the use of technical studies, indicators, and other analysis tools (Forex.com www.forex.com) Technical analysts look for similar patterns that have formed in the past and will form trade ideas believing that price could possibly act the same way that it did before. From the chart above, you can see how key fundamental news created incredible volatility in the market but the underlying technical analysis was still intact. From this, we can gather that although fundamental analysis is important, technical analysis is just as important. See charts below to identify how we could have traded the key fundamental moments over the past few years. See links below for more trade ideas and in-depth analysis!
Education
by WicktatorFX
29
WHY PIPS DON`T MATTER#ExplanationHey tradomaniacs, ever since I`m in this business I see posts about "Profit in pips" and how important allegedly pips are. I can tell you... this is non-sense unless you trade the same PAIR with exact the SAME Risk-Reward over and over again! In this post, I want to clarify and show you that it is absolutley senseless to count the profit in pips as it says nothing about your actual profit! NOTICE: THERE IS A BUG IN THIS POST SO OPEN THE SNAPSHOTS AND CLICK ON IT AGAIN! So let`s have a look at the first chart and see what we got here... In this scenario you see two trades with exact the same risk-reward-ratio of 5:25. This means you risk 1$ for 5,25$ or can win 5, 25x more than you can lose. We assume here that we risk 1% per trade. Scenario 1️⃣: 👉You win EUR/USD and lose USD/JPY EUR/USD: Risk: 1% Profit in pips: 68 pips Profit in %: 5,25 USD/JPY: Risk: 1% Loss in pips: -5 pips Loss in %: -1% Result in pips: 68 pips - 5 pips = 63 pips profit Result in %: 5,25% - 1% = 4,25% Scenario 2️⃣: 👉You lose EUR/USD and win USD/JPY Risk: 1% Loss in pips: 13 pips Loss in %: -1% USD/JPY: Risk: 1% Win in pips: +25 pips Profit in %: +5,25% Result in pips: 25 pips - 13 pips = 12 pips profit Result in %: 5,25% - 1% = 4,25% The real profit on your account is 4,25%, no matter which trade you`ve won and how many pips you`ve made! The pip-difference is 51 pips, but you still have these 4,25%, no matter which trade you win! Why is that? Now look at USD and at JPY-Pairs. A pip in USD, or MAJOR-PAIRS is always the fourth figure behind the komma. 👉 1,248(0)0 A pip in JPY, or JPY-PAIRS is always the second figure behind the komma. 👉 107,6(8)5 Let`s calculate the pip-difference from Entry to target for both pairs: 1️⃣ EUR/USD: Take-Profit - Entry 1,2547 - 1,2479 = 0,0068 = 68 pips 2️⃣USD/JPY: Take-Profit - Entry 107,935 -107,685 = 0,25 = 25 pips Also notice that if you lose both trades that a -5 PIP loss and a -13 PIP loss are both the same LOSS of 1 % if you stick to a consistent risk! IT DOESN`T MATTER! Okay, let`s say you trade the same pair with the fourth figure behind the comma as a pip, but you trade with different risk-rewards but a huge move you catch! In this case you trade with a different risk-reward as you need a wider stop-loss due to volatility and you want to advoid to get stopped out! You use the same strategy to follow the trend, but now we had news that pumped EUR/USD like hell! Scenario 1️⃣: 👉You lose the first EUR/USD trade and win the second EUR/USD trade EUR/USD #1: Risk: 1% Loss in pips: -13 pips Loss in %: -1% EUR/USD #2: Risk: 1% Win in pips: +140 pips Win in %: 4% Result in pips: 140 pips -13 pips = 127 pips profit Result in %: 4% - 1% = 3% profit on your account Scenario 2️⃣: 👉You win the first EUR/USD trade and lose the second EUR/USD trade EUR/USD #1: Risk: 1% Win in pips: +68 pips Win in %: 5,25 EUR/USD #2: Risk: 1% Loss in pips: -37 pips Loss in %: -1% Result in pips: 68 pips - 37 pips = 31 pips profit Result in %: 5,25% - 1% = 4,25% profit on your account Even though you`d make 127 pips in scenario 1, the real profit would be 1,25% less on your account! ERGO: More pips = Less profit So let`s head into a very extreme example of HOW pips don`t tell you a s**t about your profits! ;-D In this example we compare a GOLD-TRADE with our recent EUR/USD-TRADE. I don`t want to spamm this post with too many calculations so I try to keep it simple here. Important to notice is that the PIPS for GOLD are represented by the second figure behind the comma. In this scenario we buy Gold at 1.800$, or 1800,0(0) <- Cents A dollar change in Gold , for example 1800 to 1801, is called a POINT. A dollar change in Gold would be 100 Cents, or 100 pips! So let`s say you buy gold with a risk-reward of 2:1, means you risk 1$ for 2$ or can win 2x more than you can lose. In this case you would make 20 POINTS as the price moves from 1.800$ to 1.820$. In pips you would make 2.000 friggin pips but only 2% profit compared to your 68 pips in EURO /USD with 5,25% profit. One last example: In this scenario you win the EUR/USD trade and LOSE the GOLD-TRADE: EUR/USD #1: Risk: 1% Win in pips: +68 pips Win in %: 5,25 XAU /USD: Risk: 1% Loss in pips: -700 pips Loss in %: -1% Result in pips: +68 pips - 700 pips = -632 pips profit Result in %: 5,25% - 1% = 4,25% profit on your account You would lose -632 pips but make a real profit of 4,25% on your account! So when do PIPS really matter? If you would trade the same PAIR with the same RISK-REWARD over and over again as you would always win and lose the same amount in %. If you`d trade the same EUR/USD trade, PIPS would actually make sense to be counted. But who trades that way? Almost noone! What does that mean for your positionsize in LOT? They always VARY! Use a position-size-calculator to get your right position-size. But thats a topic for another post... :-) IF YOU WANT TO SEE MORE EDUCATIONAL CONTENT PLEASE LEAVE A LIKE AND A COMMENT.. especially when this helps you! :-) Peace and good trades Irasor Wanna see more? Don`t forget to follow me
Education
by Trading2ez
19
Backtesting retest Break of Market Structure on Multi TimeframeStrategy Create a zone from the order block which created break of market structure on 1D timeframe Wait for it to be tested on 4H timezone => which will create new 4H order block Trade the retest of that 4H order block Color coding & icon use Green boxes : 1D order block zone Yellow boxes : 4H order block zone Tick icon : Trade won on 4H Cross icon : Trade lost on 4H Circle with cross icon : Trade in breakeven Win / loss assumptions Win : 3R movement without breaking -1R Loss : -1R movement Breakeven : 1R movement, followed by -1R movement Risk Management 50% TP @ 1R 25% TP @ 2R 25% TP / Trade closure @ 3R RR achieved = 3R Net R achieved = 1.75R Strategy results Testing duration : Jan 2020 - Jan 2021 Wins = 16 Loss = 7 Breakeven = 4 Non-losers = 74% Absolute Winners = 59% Net RR = 21 Avg R/Win = 1.31R Avg R/Trade = 0.78R
Education
by makuchaku
8
10 Awesome 'Hidden' Gems on TradingViewWelcome Traders! In today's trading episode, you will learn and get to see some of the best 'hidden' gems on TradingView. A lot of you are new to TradingView and may not know some of these features. TradingView has a lot of really neat features so take time to click on different elements to see what they do. Thank you @TradingView for creating such an amazing platform! Take time to practice what you learned in today's video. Until next time, have fun, and trade confident :)
Education
by tradeconfident
88
Price Oscillator StrategyThe Price Oscillator uses two moving averages. ✔ One shorter-period, and one longer-period. ✔ When 2 MAs cross each other the PO reads 0. The Price Oscillator technical indicator can show overbought and oversold areas. Strategy: Only go long in an uptrend. Only go short in a downtrend Uptrend strategy: Look for an oversold situation to open a buy position. Close when get to overbought then close some more when crossing back to the zero line. Downtrend strategy: Look for an overbought situation to open a sell position. Close when get to oversold then close some more when crossing back to the zero line.
Education
by apadanaforex
2
EURUSD 1D MEAN REVERSION TRADING STRATEGYBest Mean Reversion Strategy: Before we get to that point, first and foremost, let’s see what tools we need to use for this strategy. The best mean reversion indicator that works 85% of the time is the RSI indicator. So, you will need the RSI oscillator on your charts. Now, there is one more important thing that needs to be done. The RSI settings must be changed from the default 14-period to 2-period RSI. So, we’re having not just any type of RSI, but a very fast RSI. Levels are 10 & 90. The other technical indicators we’re going to deploy on the charts are: 10-period simple moving average. 200-period moving average. Note* Another thing to keep in mind is the recommended time frame is the daily chart. Intraday charts won’t work because the fast-period RSI will generate a lot of false signals on lower time frames. Now, let’s see how we can combine the 3 indicators into a profitable mean reversion strategy. The first obvious question is when to buy and sell currency. To answer this question the mean reversion trading strategy needs to satisfy 3 triggers: The price needs to be above the 200-day EMA. This means that the overall price is in an uptrend so, we’re only going to look for buy signals in bull markets. Second, we look for the price to below the 10-day SMA, which shows a deviation from its mean. Last but not least, we look at the RSI to overshoot below 10, which signals that we’re in oversold territory. Note* For sell signals use the same trading rules but in reverse. Once all 3 conditions are satisfied we enter a trade at the open of the following day. Once we’re in a trade we also need, we also need to know when to exit the market. This is where the 10-period simple moving average comes into play again. What we’re looking for is for the price to reverse back to the 10-period SMA strategy. More often than not the price will overshoot to the upside and break above the 10-period SMA. So, to fully capitalize on the entire move we use multiple take profit targets: The first profit target is to cash half of the position once we touch the 10-period SMA. The second portion of your position is left until we break and close above the 10-period SMA. Based on our backtesting result, on average your trades should reach the second target within 1-3 days. The longer you keep your position open, the lower the chances of the trade to succeed. As a general rule, you should cash out of your entire position within the first 3 trading days. Now, we have left out for last the most important part, which is managing risk. When it comes to the protective stop loss we’re advising not to place a stop loss right away, but instead, use a time stop. Let me explain… Based on our backtesting results we have found that a lot of the times the market will do a false breakout below the previous day low (high) and hurt our position. So, to avoid this scenario we have found a great trick to move around it. Our rule is very simple: If by the first half of the day our position shows a loss, we close that trade and call it a day. This is a risky play but we have the edge on our side to play this kind of trick. After all, trading is a risky game and everyone needs to decide for themselves how to manage risk. Final Words – Best Mean Reversion Strategy In summary, the most alluring thing about mean reversion trading is the high win-loss ratio and the simplicity behind it. One thing to keep in mind is that the mean reversion strategy tends to perform poorly when the market is in a hard-mode trend. But that shouldn’t be much of a big deal since the market is ranging 75% of the time. The key takeaways from the mean reversion trading strategy are as follow: Mean reversion can be used with all asset classes (stocks, commodities, currencies or cryptocurrencies). Range trading and overbought/oversold signals work the best with this method. Adjust the RSI settings to a fast-period. You can generate quick profits – short holding time periods. A trading tip – use a time stop instead of a price stop. Thank you for reading! Mean Reversion Trading Strategy with a Sneaky Secret. In this guide, you’ll learn a mean reversion trading strategy with some trading secrets that will assist you to limit the downside. The first part of the guide will highlight what is mean reversion trading, while in the second part we’ll reveal the mean reversion strategy and how you can fine-tune it to fit your personality. If this is your first time on our website, our team at Trading Strategy Guides welcomes you. Make sure you hit the subscribe button, so you get your Free Trading Strategy every week directly into your email box. The mean reversion trading systems are more appealing to a lot of traders because it tends to have a higher win rate as opposed to the trend following strategies. Even when the markets are in well-established trends, mean reversion happens quite often. So, there are more opportunities to profit from mean reversion trading. Let’s kick the ball rolling and start with the basic by first explaining what is mean reversion in trading and then we’re going to reveal 5 trading principles that can be used with the mean reversion strategy. Table of Contents 1 What is Mean Reversion Trading? 2 How Mean Reversion Trading Works? 3 Why the Mean Reversion Strategy Works? 4 Mean Reversion Trading Strategy 5 Final Words – Best Mean Reversion Strategy What is Mean Reversion Trading? Put it simply; mean reversion trading assumes that over time the prices of any asset (stock, commodity, FX currency or cryptocurrency) in time will revert back to the mean or average price. In other words, reversion to the mean trading comes down to the old saying: “What goes up must come down.” The mean reversion theory is at the foundation of many trading strategies that involve buying and selling of those asset class prices that have deviated from their historical averages. The idea is that in the long-term prices will return back to their previous average prices and normal pattern. Example of mean reversion trading strategies includes: Reversals. Pullback trading. Retracement. Range trading system. Overbought and oversold strategies. Our best mean reversion strategy is to trade those price ranges that occur after a severe price markup or markdown. In this case, reversion to the mean implies trading around the middle of the range as our average price. In essence, mean reversion is playing around a central value be it the middle of the range, or a moving average, or however you wish to express it. The reversion to mean trading system tends to produce a higher win rate in those instances where we can notice extreme changes in the price. We can measure extreme price changes relative to the time frame used. Obviously, there is also a probability that the price will not revert back to its mean. This can indicate that there is a real shift in the market sentiment and we’re in a new paradigm. Now that we know what is mean reversion trading, let’s see how the mean reversion regression works. How Mean Reversion Trading Works? With mean reversion, we’re looking to trade against the heard. A lot of the times when you’re doing mean reversion trading, you’ll be quick in-and-out of a trade. That’s why day trading mean reversion strategy works better. There are other different ways to trade with the mean reversion strategy, including: Price stretch from a simple moving average strategy. A break outside the Bollinger Bands strategy and a return back to the mean. A test of support and resistance strategy while the price is consolidating. The linear regression is clearly slopping upwards and it’s acting as a magnet to the price. Each time the price deviates from the average price line it snaps back to it outlining the reversion to the mean concept. The main advantages of the mean reversion strategy include: Effective exit strategy – the take profit target is always the average price. High win rate – the shorter the mean reversion time frame used the higher the win rate. Good risk-adjusted returns. All trading strategies have their own pros and cons. The biggest flaw is that once you’re in a trade you’ll often see first a loss before you see a profit. The main components of the mean reversion strategy should include: 1. Entry signal after the price has moved away from its average price. You can simply calculate how far away percentage-wise are from the mean or use an ATR strategy multiple declines or simply use a volume oscillator to gauge oversold/overbought readings. 2. Exit signal gives you a way out once you get into a trade. 3. Broad market timing. Why the Mean Reversion Strategy Works? Mean reversion is a key element part of how all financial markets work. Mean reversion happens because the prices have a tendency to overshoot and undershoot their intrinsic value. These “price anomalies” happens because the impact of new information that hits the market takes time to be digested by the market. The market participants will take some time to understand the new information as the information is filtered slowly. Additionally, it takes time for the market to establish a fair value. Secondly, mean reversion trading also works because prices also move based on collective emotions. What this means for traders is that the price tends to overshoot to the downside a bit more than they overshoot to the upside. This is true because fear tends to be a bigger emotion than greed. Let’s put the puzzle pieces together and construct our reversion to the mean trading strategy.
Education
by Tradingstrategyguides
3