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Oscillators

Using the Relative Strength Index (RSI)Using the Relative Strength Index The Relative Strength Index (RSI) is a very popular and often used indicator that can be used effectively in many different ways. My personal favorite two are: 1. As a tool to indicate a reversal. This is the most popular way. 2. As a momentum indicator. This is what it was designed for. Below we will discuss how to read the RSI, and how to set it properly depending on market conditions. What the numbers mean Before we discuss what to do with the information that the RSI gives us, we should learn what the numbers mean. The RSI is a line graph that moves from 0 to 100. When the RSI is 70 or over, we consider our crypto to be overbought (people bidding up the price). Then when the RSI is 30 or below, we consider our crypto to be oversold (people bidding down the price). Overbought means that the crypto might be overvalued. Oversold is the reverse. The crypto might be undervalued. The actual number is calculated using the average gain or loss over a set period of time. The default time period is 14 (minutes, hours, days, based on how the chart you are currently looking at is set). You could also set your period length to a lower number, I use 10 sometimes, so that the RSI is more sensitive to recent moves. This is good to do in markets that are highly volatile (crypto for example). The actual RSI number will increase as there are more and more positive closes within your time period, and will fall as there are more and more negative closes within your time period. As with every trading indicator, the RSI should not be used as the sole reason for a trading decision. It helps paint a picture of the market of the particular crypto you’re looking at. Nor are the default values always to be used. We’ve discussed time changes, but you could also change the upper and lower bands. In a bull market you may want to change the upper band to reflect the general trend of the market (more on that later). Trend Reversal Now, let’s about how to actually use the RSI. The first way to use it is as a way to spot a possible trend reversal. Put simply, the RSI can help us see if we have, in the last few candles, changed from an up-trend to a down-trend, or from a down-trend to an up-trend. When the RSI is below 30 and crosses up, we consider this a bullish move. When the RSI is above 70 and crosses down, we consider this a bearish move. Just to reiterate: A bullish cross up is not an automatic buy, just as a bearish cross down is not an automatic sell. As you can see below. But it is pretty accurate. Nothing in TA is 100%, but the closer you get to 100% the better trader you will be. One other thing to note based on the above picture is that there was no time that the RSI dipped below 30. In a crypto bull market (which we are currently in) it is more common to see cryptos that are overbought as opposed to oversold. You can compensate for this by changing the oversold line to 40. Additionally, as the crypto moves up in price, you can see the RSI making consistent higher lows. Divergence One thing to look for when you are trying to spot trend reversals is what is called a Bullish Divergence. This means that the price of your crypto is in a downtrend and making lower lows. At the same time, the RSI is oversold and is making higher lows. When you spot this, it can be a very powerful indicator that the trend is reversing to the upside. A bearish divergence is the same thing but in reverse. The price of the crypto is getting higher and higher while the RSI is overbought and making lower highs. RSI as a momentum indicator Another way to effectively use the RSI is by using it for its intended use as a momentum indicator. As we talked about before, the RSI rises as we have more and more positive closes in our time window. It rises more (faster) when the price movements are more extreme to the upside. The reverse is true for the downside. So, if we are oversold that means there is momentum to the upside, and if we are overbought that means there is momentum to the downside. Generally, it is better to trade with the momentum than against it. Unless we spot the reversal signals that we discussed above; crossing back down, or crossing up. It is also better to go long in bull-markets and short in bear markets when using the RSI in this way. Let’s take a look at the chart below: In a bull market the 50-60 range of the RSI acts as support and the RSI usually stays above 40. I like to set my upper band to 60 in a bull market so I can trade with the bullish momentum and spot potential reversals in the 50-60 range. As you can see it is necessary to use the RSI differently in different market conditions. Final thoughts As you can see there are different ways of successfully using the RSI. I hope I’ve made at least two of those ways clear in this beginner guide. Please let me know if you have any questions and if you like it, please hit the thumbs up and be sure to follow for more! Thanks for reading!
Education
by zsamochin
63
Hash Ribbons buy signal breakdown and verbose explanationThere are two decision branches the indicator may take to trigger a buy signal. I've copied the most relevant lines of code below and added comments. I added a visual representation for every single element that exists in those lines of code. The different indicators I add here have educational purposes only. The original script already does an excellent job presenting the most relevant information. The coloured spring (circles) leading to a buy signal has everything I want to know. Publishing this idea has the main objective of serving as a cheatsheet for myself if I forget all the underlying context later. first buy condition (blue circle and dotted line) price momentum just turned positive, and hash rate growth has recovered after price momentum turned negative and miners capitulated crossover(s10,s20) and // simple moving average checkmark barssince(recovered) < barssince(crossunder(s10,s20)) and // red range on the price chart barssince(recovered) < barssince(capitulation) // red range on the price chart or second buy condition (purple circle and dotted line) price momentum is currently positive, and shorter term hash rate growth is higher than the longer term hash rate growth s10>s20 and // green range on the price chart crossover(HR_short,HR_long) // hash rate growth checkmark
BITSTAMP:BTCUSDEducation
by givanse
1
How to Select the Most Suitable Trading Indicators? One of the most commonly asked question by novice traders is "what indicators should I use?" which is unsurprising given the vast array of available tools on a typical trading platform. Some traders prefer to crowd their charts with all sorts of indicators, whereas others prefer a more minimalistic approach. While there is no perfect solution, one thing should be abundantly clear- the indicators you select should help you make sense of the price action rather than distract you. When it comes to the number of indicators one should use, the more does not necessarily mean the better. In order to narrow down your options, you can use the following guidelines we have compiled for you so that you can diversify your options depending on the underlying market sentiment. Is the market trending or ranging? The first thing that needs to be determined is what the underlying sentiment is - is the market trending or range-trading. While a keen eye can catch the subtle difference between the two without the use of any indicators, the ADX (Average Directional Index) can be used to determine the strength of the trend. Whenever the ADX is threading above the 25-point benchmark, this underpins a robust trending environment. Conversely, a reading of the index below this threshold indicates undetermined (ranging) market sentiment. If the market is trending, focus on the underlying momentum Price trends are by definition probing either lower or higher, which is why you need to track their changing strength as they develop. This is crucial for the implementation of trend-continuation or trend-reversal strategies. Filling the chart with multiple moving averages with different periods does a perfect job of underlining the changing market bias over time. That is so because MAs can be used as floating supports and resistances, and the behaviour of the price action each time it probes a given MA highlights the changing nature of the trend. The inability of the price to break down below one or several MAs in an uptrend can be perceived as an indication of persisting bullish commitment in the market. Hence, traders can use trend-continuation trading strategies and place long orders while the price probes the MAs. The opposite is true for downtrends. The eventual probing and subsequent penetration of the price above (in uptrends) or below (in downtrends) MAs with higher periods signifies waning commitment in the market. The gradual narrowing down of the space between various MAs followed by an eventual breakout/down underpins the possibility for using trend-reversal strategies. Also, keep in mind that MAs with higher periods are usually found at the bottom of the string in uptrends and on top of the bundle in downtrends. If the market is ranging, bet on the Stochastic RSI In ranging markets, in contrast, there is little need for moving averages, as the price action is naturally contained within a horizontal area. Instead of focusing on the direction of the price action, in this case, it makes more sense to study the discrepancies in the underlying buying and selling pressures. The Stochastic RSI is among the best-fitted indicators to do this job, which is why it is most effective in strong ranging environments. It can be used to gauge the likely rebounds of the price action within the two extremes of the underlying price range. If the ADX has been threading below the 25-point benchmark for quite a while and the Stochastic RSI is getting into one of its two extremes (overbought and oversold), this can be perceived by traders as a potential indication of imminent reversals in the direction of the price action.
TVC:SILVEREducation
by Trendsharks
Educational: AB=CD pattern w/ BTC exampleOne fairly easy and useful pattern for determining reversals is the AB=CD pattern. The pattern simply looks for two rising or falling legs up or down respectively. Then one simply measures the retracement level from point B followed by the projection from C (luckily tradingview has a tool to assist with this). If these values equal a 0.618 or 0.786 retracement followed by a 1.272 or 1.618 projection respectively, the pattern is likely to indicate a reversal of the current trend. For example, above we can clearly see the pattern almost perfectly matched the required levels of 0.618 and 1.272. However, no pattern is guaranteed, so it is always recommended to seek out confirmation. As we can see in the above example, there is bearish reversal divergence that can be seen on both RSI and MACD (dotted green lines), whereby price is rising while oscillators are falling, indicating an even greater likelihood for a reversal. Upon confirmation of a reversal, one can then target Fibonacci retracement levels as key points of interest as can be seen above. A nice part about this pattern is how simple it is to spot and draw out particularly with tools available on tradingview. Hopefully you are able to use this pattern as another useful tool in your arsenal!
BITSTAMP:BTCUSDEducation
by crypto_trends
Popular Trading Indicators (Simply) ExplainedEvery full-time trader knows that rule number 1 in this business isn't to make money; rule number 1 is: don't lose money. Hence, any successful, long term trading strategy must inherently focus on managing risk. I know that lately the word risk carries next to no meaning, and that's because the more risk you take, the more you're rewarded, while those who manage their risk, and are potentilly risk averse in general, pay the price (in purchasing power terms). Having said that, in this context, trading with risk in mind is critical to following rule number 1, and it's essential to managing your risk exposure, and creating a sustainable, successful trading strategy. Moving averages (MA): Sifting through dozens of mathematical functions to help understand, and predict price action can be very challenging. But, having an understanding of why we use certain indicators is a great place to start. Let's begin by talking about MAs. The name is self-explanitory, of course, and it's not much more complicated than that. When we're looking at a MA, what we're seeing is an average of the price over a specified period of time. Now, you could say that using a 20 day simple MA is better than using a 21 day exponential MA (which places more emphasis on recent PA). But, this is a moot conversation, because we don't actually know what they mean until we explore what the MAs reveal for the timeframe being analyzed. By knowing and focusing on industry standard MAs, we can see what larger institutional desks might be seeing, and those MAs include the 20 day MA (20DMA), 50 day MA (50DMA), 100 day MA (100DMA), and the 200 day MA (200DMA). When we apply these MAs across multiple timeframes to derive a thesis on price action, it all starts to make sense, and you can see these industry benchmarks being respected on the longer time frames, clearly. However, when you look at price action post 2008, it's almost as if the intraday MAs are seemingly ignored completely. The HFT EFT flows are so heavy and they distort price so drastically, imo it's a losing battle trying to day trade based on intraday MAs. Relative Strength Index (RSI): The relative strength index (RSI) is a great momentum indicator used to gauge whether or not a financial instrument is overbought or oversold. It's analyzed as a line graph with a range of 0 to 1, the latter being the top of the range, with overbought conditions identified at a value of greater than 0.70, and oversold conditions being observed with a value of 0.30 or lower. These polar extremes often indicate that a reversal is about to occur. Fibonacci Retracement (Fib): The Fib is a very popular and is used to gauge the magnitude of a price retracement. For example, if a stock falls 25%, and then bounces hard on high demand, we could apply a Fib to benchmark the move against previous, similar moves. How the Fib works, is it uses a mathematical formula which adds the previous two number together to get the next. For example, starting at 0, the Fibonacci sequence is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, etc.. Within the Fib indicator, there are 5 key levels to watch after you've applied the 0 and 1 ranges to your price move, which includes the 0.236, 0.382, 0.5 (not officially included but useful), the 0.618, and finally the 0.786. Typically, I divide the asset price by the money supply (M2), to find tradable Fib levels (a lot of price distortion currently as I mentioned). Volume: When the price of an underlying security changes, what we're witnessing is the demand and supply (discovery) process. While this does tell us a lot, volume tells us the power of the move, and hence also the weakness of a move. For example, when we're seeing price rise as volume falls, the power of the move is diminishing, therefore it tells us that the move/trend could be nearing exhaustion. Placed together with other indicators that may also be flashing "red" could help us make better, and more informed decisions. In forex, however, volume points to the number of price changes which occured within the specified time interval. This is a bit different than stock or bond price volume, but essentially speaks to the depth of the market as well as the participation rate, just as it's peer does.
AMEX:SPYEducation
by Hedge_Of_The_World
4
RSI: Is it any good?RSI is the most popular indicator, according to TradingView. So why does it test like garbage? I show you backtest results using several RSI strategies: Crossunder from overbought/crossover from oversold (the default RSI strategy provided by TradingView and suggested by Wilder) RSI + EMA 200: is RSI profitable with the trend? RSI + ADX: is RSI profitable in sideways markets? RSI + Divergences: can RSI with divergences find turning points in the market? EMA fun fact: we use EMA's today because the previous generations of traders didn't even have calculators. EMA's aren't any better than other moving averages, but they are much easier to calculate by hand. Questions/comments welcome.
NYSE:OISEducation
by gregoirejohnb
MACD From ScratchHi, traders! Today we gonna start the tutorial “Trading from scratch”. These short but very useful articles are intended for beginners who’s just started their way in trading. We hope you’ll enjoy. Today’s article will give the full understanding of one the most popular, easy and very useful indicator - MAC. Moreover, we’ll show you how to apply it efficiently. MACD (Moving Average Convergence/Divergence) is a trend indicator that shows the trend and its momentum. It consists of two lines: MACD line and signal line. Both of them are EMA with different periods. We got MACD line subtracting from EMA with less period (fast) EMA with longer period (slow). The signal line is MACD line smoothed by the very short EMA. How to trade with MACD? Divergence The first very powerful signal is divergence. Divergence means the difference between slope of the trend line on chart and indicator. To learn about it properly you can read our Divergences Cheat Sheet . Catching divergences is a good signal to buy or sell. As you can see on the screen, the first time we got bearish regular divergence. Thus, we are going to short. Then we can see bullish hidden divergence and it’s a good chance to execute a long position. NOTE We can draw divergence lines both on MACD line and histogram.
Education
by Skyrexio
2
The DEFINITION of Divergences!Hi every one So in this post we want to talk about a thing that If you've been following us you would've see a lot of it ! we wanna talk about Divergences! and how to use them to our advantage! there 4 kind of divergences in total which we will describe one by one! 1-regular Bearish Divergence (-RD) 2-regular Bullish Divergence (+RD) 3-Hidden Bearish Divergence(-HD) 4-Hidden Bullish Divergence(+HD) first let's talk about the effects of divergences and than get into each one. divergences are strong signals that will reassure us of the continuation of the trend or the ending of them! so let's get into each one! note that the trend is pretty important in finding divergences! for finding regular divergences on a bullish trend we must look at the tops and in a bearish trend we must look at the bottoms. for Hidden divergences though we must look at the bottoms (in a bullish trend ) and tops (in a bearish trend) so let's get into it! 1.regular bearish divergences (-RD): these divergences accrue when the tops are higher than each other(in a bullish trend),but on RSI or MACD indicators the tops are lower or in the same position next each other (in a bullish trend) in this situation we can be sure that the trend is about to change and start the bearish movement at least for a while! these are examples which clearly show the effect of (-RD) on the trend of the market. 2-regular bullish Divergence (+RD) : this divergence is accrued when the trend is bearish (bottoms are lower than each other ) but on RSI or MACD indicators the Bottoms are higher or next to each other. in this situation we can come to a conclusion that the trend can't be bearish for ever and the trend must change! this is an example for (+RD) which you can see It's effect on the market! 3-Hidden bearish Divergence(-HD):The tops are lower than each other ( in a bearish trend) but the tops on MACD or RSI indicator are higher or in the same position next to each other in this situation we can be sure that the trend can still be bearish . this is an example for(-HD) : 4-Hidden Bullish Divergence(+HD): these divergences accrue when the bottoms of a bullish trend are higher than each other but on the MACD or RSI the bottoms are lower or in the same position next to each other in this situation we can be sure that the bullish trend can still continue! this is a clear example of (+HD) and It's effectiveness! We hope that you've learn something with this post . Have a nice day and Good luck.
BITSTAMP:BTCUSDEducation
by CobraVanguard
37
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.
BITSTAMP:BTCUSDEducation
by apadanaforex
How to use the RSIHi guys, today I will be explaining how to use the Relative Strength Index (RSI) to your advantage. First of all if you have not already, please follow me. Okay, so the RSI is commonly said to buy when oversold and sell when it is overbought. However, this strategy does not always work, and can result in you predicting what the security will do. First Step: You should first check to see if the RSI is making higher lows, or lower lows. This is important because it can show whether the asset has strong buying pressure or weak buying pressure. I call it buying pressure because the index essentially represents the demand for it. So, why would you short something, when tons of people are buying in? However, the index can work short term, if you are day trading, but does not work as well for swing traders. If you see a rising RSI it is a good sign, and the opposite for a falling. Second Step: This is a step where most people don't do, but I think is very important. The step is to check whether or not the asset has an RSI that is hitting overbought, or hitting oversold. In this example, Gold is hit oversold two times. This proves how weak gold is and why it could have a breakdown. Another thing to check in this step is if it stops falling at the oversold level and does not fall beneath. If this occurs, it is a great sign because it shows that the asset is strong. For Gold, it had done that, and if you had spotted that you could have made 40%! In sum, the second step is to see if the asset is hitting overbought levels (good), or hitting oversold levels (bad). Third Step: The next step is to draw support and resistance levels, look at other indicators, etc. You could even look at fundamental data to support your technical data. Last step: Your last step is to place you limit order, and or stop order. Thanks for viewing guys, and please like and follow. Thanks!
AMEX:GLDEducation
by SmartVest
A 100% profitable strategy on BitcoinHello guys, in the Daily chart of Bitcoin after last candle close, recently something bullish happened, short term 5 Moving average crossed long term 20 Moving average. MACD is also supporting the further upward movement in the daily chart. this is a bullish signal in an uptrend. this is one of my swing trading strategies in Bitcoin market. I'll go long with a low leverage margin, whenever this daily Moving average crossover happens. I'll close the position as soon as the opposite situation happens which is short term 5 daily MA crossing down the long term 20 daily MA. A useful tip to this strategy is to combine it with a oscillator indicator like MACD or STOCHASTIC to prevent the fake outs. For example do not go long if the STOCH is at overbought territory and do not go short if It is at oversold territory. Disclaimer** This strategy doesn't work in a range market condition. Only use it in trendy markets. You can go back in the chart and backtest this strategy, it is pretty great for swing trading. Please like and share this idea if you like it. Thanks for your attention
Education
by TiranTrading
3
How to set the RIGHT Stop loss!Hey hey traders!! Setting the "right" stop loss is a vital skill, yet for many traders... its a random act. This video will help you find stcutrue in setting the right stop loss, a stop loss that has the best chance of not being hit and allowing your trade to workout! For us that comes down to basics: 1. Use the ATR value 2. Enter only via the fibs (definite entry) and by following this process we have achieved great things so far, even increased our win ration by a solid 12% in February (since we added it) If you have questions, feel free to ask! All the best and good luck trading!
Education
by PrimedGroup
TDI Indicator for Entry SignalTDI (Traders Dynamics Index) is a powerful tool that determine the entry signal This indicator consists of 3 important indicators a below RSI (30, 70) Period (20) --> Green MA (50) --> Red Bollinger Bands --> Yellow with Blue band lines How to use the above indicator is as below When the Green cross the Red positively, this is a green signal to buy When the Yellow cross the Red positively, this is a green signal to buy When the Yellow moves above the Red line, the market in up trend. If the Yellow moves below the Red line, the market in down trend Crossing the Yellow line of the lower RSI band from bottom to top mean time to buy, while Crossing the Yellow line of the upper RSI band from top to down mean time to sell Crossing the Yellow line the average RSI line (50) means time to buy When the Green line cross the upper BB means the trend is strongly going up. If the Green line cross the lower BB line means the trend is strongly going down Easily can determine the RSI Divergence (opposite top or bottoms) with the stock. If opposite bottoms, time to buy and if opposite top, time to sell Best buy signal is when the Green line cross the Red line positively after the existing of RSI Divergence at the essential level
NASDAQ:AAPLEducation
by hamzaabusitta
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
TD line and projectionHere you can see how to use Tom Demark trendline (that connnects peaks / thorough of more or less equal height / value) and projections. Best of breakout occur with gaps. Prebreakout candle has to close close to the trendline and make a minor pullback before the break occurs. If breakout candle has long rejection shadow - it will not work. Projection are drawn from the lowest closing price to the TD line and then projected from breakout point. You can also see how to use missed pivots that mark new trends (buy upon pullback to the next pivot) - after Rob Booker.
UEducation
by ICFX
2
Why does technical analysis work?Introduction If you're here on TradingView, it's probably because you believe that charts and technical analysis can give you an edge in the trading of currencies, metals, cryptocurrencies, and stocks. Granted, sometimes technical analysis doesn't work, but it works often enough to keep hundreds thousands of traders coming back here day after day. The larger question is why . Four Reasons Technical Analysis (Sometimes) Works To a fundamental trader like me, technical analysis can sometimes seem like voodoo. Why should lines on a chart tell me anything useful about the total value of future dividends and cash flow for a stock? I admit I especially roll my eyes at Fibonacci ratios. Personally, I feel they're about as scientific as using divination or horoscopes to buy and sell stocks. But then again, if a lot of people believed that their horoscopes could help them win at stocks, you'd be a fool to ignore them. In fact, you could then gain a large edge by using astronomical data to forecast future horoscopes, getting tomorrow's horoscopes today. Which brings us to the first and most basic reason that technical analysis works: It works because people believe it works. If a lot of traders believe that Fibonacci ratios apply to stock markets, then a lot of traders will set their buy and sell orders at significant Fibonacci retracement levels. And then there's another whole contingent of traders who don't believe in Fibonacci numbers, but they know that lots of other people do, so they set their buy and sell orders there anyway. It becomes a self-fulfilling prophecy. Active trading is largely about predicting what other traders will do, and technical analysis is their playbook. And predicting other people's behavior brings us to the second reason that technical analysis works: It works because human psychology follows patterns. For instance, trend-following strategies might work, in part, because of "bandwagoning" and the "Fear of Missing Out" (FOMO). If traders see their friends getting rich off of Tesla or Bitcoin, they will fear being left behind. Speculative enthusiasm cascades through social networks until it has saturated them and everyone is leveraged long to the gills. Only when there's no one left to convert does the momentum finally stall. (Wall Street traders often quip that when their barber starts giving them stock tips, the market is saturated and it's time to sell.) As for support and resistance levels, they work partly because of regret. People remember the price they paid, or the price they wish they had paid, and that memory then shapes their behavior. For instance, if traders remember that they missed several opportunities in 2020 to buy an SPY dip to $323, then they are more likely to buy that level in the event of a future dip. What about oscillators? Well, perhaps humans distrust anything that moves too fast. Even if I'm romantically interested in someone, I'll still pull back if she proposes marriage on the first date. Plus, humans are loss-averse, so at some point we like to lock in gains. It works because it takes time for the market to fully price in news . The advent of algorithmic trading has made it hard for traders to gain an edge by reacting to news events. Stock prices move fast the moment a headline hits, so by the time you see it, you may already be too late. That said, algorithms are pretty good at picking the direction a news event should move a stock, but not necessarily the magnitude . The initial fast news response is often followed by a slow news response as the information spreads through the human population and its implications are assessed and priced by human traders. Trend-following strategies may be able to pick up on these slower processes of repricing in light of news. It works because today's news begets tomorrow's news . This is probably the most underappreciated of all the reasons that technical analysis works. Good news often leads to more good news. If a company posts a large positive earnings surprise, then there's also a good chance that it will get a dividend raise, analyst upgrades, or upward revisions of future estimates in the days or weeks to come. Likewise, bad news often leads to more bad news. For instance, if the company posts a negative earnings surprise, then there's an increased chance that it will need to take on debt or issue shares to sustain operations in the future. The same principle applies to industry-wide or even economy-wide news. If, for instance, the state California bans a company's product, then there's an increased chance that other states will follow suit. And if the Federal Reserve cuts or raises rates, then the next rate change is likely to be in the same direction, because Fed policy goes in cycles. The news-begets-news principle means that trend-following strategies might work, in part, because they are detecting the current direction of the news cascade. Three Reasons Technical Analysis Sometimes Doesn't Work I should emphasize, however, that technical analysis doesn't always work! Here are a few reasons it might not work sometimes: Traders try to anticipate signals . The larger the number of people who know about a trading technique, the less well it works. Take supports and resistances, for instance. If I expect the rest of the market to buy at a particular Fibonacci or moving average level, then I might place my own buy order just above that level in an attempt to front-run everyone else's move. If enough people do this, then the price may not ever actually reach that level. Whales create fake signals in order to harvest profits from technical traders. For instance, if a whale knows that a lot of people have stop loss orders set at a particular support level, then the whale might short a stock to that level in order to trigger all those sell orders, causing a price collapse and an opportunity for the whale to buy shares at a cheaper price. Timing risk. Sometimes you can correctly identify the direction of the trend but still have bad timing. For instance, we're in an interest rate-cutting cycle by the Federal Reserve, which has caused a strong upward trend. But the reality is that we're probably near the end of that cycle. If the Federal Reserve suddenly changed its tune tomorrow and started forecasting rate hikes next year, it would take some time for that information to be fully reflected in slow-moving technical signals, and you could lose a lot of money if you sell only after those signals change. It's perhaps best, then, to have a good understanding of what's driving a technical trend so that you can get out early if you see the underlying drivers change.
AMEX:SPYEducation
by ChristopherCarrollSmith
77
Trend following - a different way.As folk who follow my posts know, I don't keep any secrets. I explain some of my methodology in this chart. It is bespoke. To be 100% clear, this will not work 'for you'. No methodology works 'for you'. You work the methodology through experience to create your advantages. I'm not saying that people should change to this way. I do not interfere at all with what traders want to do in their favoured methodology. There is no one road to the promised land. Controlling loss is the highest priority. The markets are there to 'eat you alive'. Price action is an important part of all this. As well, it is important to understand your particular market and learn its ways. Oh yes - with time you can come to figure out certain probabilities that may not be shown in the 'technicals'. What you see in this chart can be done on any time frame from 3 min to 1-day. I can't explain everything in one chart. I've done videos on this before. Note carefully: I do not sell anything. I do not do trainings or take anybody's money. I do not sign up to any services. I do not provide evidence of winnings or losses. Disclaimers : This is not advice or encouragement to trade securities on live accounts. Chart positions shown are not suggestions. No predictions and no guarantees supplied or implied. Heavy losses can be expected if trading live accounts. Any previous advantageous performance shown in other scenarios, is not indicative of future performance. If you make decisions based on opinion expressed here or on my profile and you lose your money, kindly sue yourself.
FOREXCOM:US30Education
by Captain_Walker