Price Oscillation and Mean Reversion Automated Trading Strategy

Discussion in 'Trading Strategies' started by Dary, Mar 4, 2014.

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  1. Dary

    Dary Dary McGovern Staff Member

    The following video from a webinar, provides an in depth analysis on the process of developing a strategy based on Price Oscillation and Mean Reversion.



    or click here to view the video on YouTube

    In the video and RSI is used to generate entry trades, with Bollinger bands introduced to act as stops. After creating the RSI oscillation strategy, an Exponential Moving Average is introduced as a Mean, with RSI providing the entry trades and the EMA being used to exit those positions when the price reverts to the mean.

    Areas covered in the video:
    • Adjust your chart interval e.g. 1 minute versus 10 minute, based on your preferred indicator to try and get a correlation between the entry and exit price points that you want to trade
    • Adjust indicator parameters to dial in the strategy
    • Using fixed level entry and exit values on oscillators such as RSI below 30 and RSI above 70 may not provide the best solution - consider adopting to the trading range by using the highest high and lowest low RSI value in this case
    • Strategies do not have to have fixed stops e.g. 20 pips. Sometimes it is best to use technical stops if for example the price moves outside its trading range, such as breaking through the outer Bollinger Band.
    • A challenge with Oscillator based trading strategies, is that the price as to rally to the other side of the trading range to get an exit; some times a more effective strategy is to use a point of weakness or strength to enter the market and take profits when the price reverts to the mean.
     
    Last edited: Mar 4, 2014

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  2. Hans

    Hans New Member

    High Dary,
    after 9:30 minutes you choose from the window: "When the alert triggers".
    In that window you choose "Trade Forex".
    Then you choose: "Close short position then buy at ask".
    In my window: "When the alert triggers", there I don't find the choice "Trade Forex" and "Close short position then buy at ask".
    How can I get this?
    Bye,
    Hans
     

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  3. Dary

    Dary Dary McGovern Staff Member


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  4. How is method going Dary? I've conceded defeat to spreads etc, particularly currencies. Just cannot find the same consistency as trading ftse all share and aim all share, in normal trading accounts. Alas, in my case, slower returns are far greater than the daily profit and give back lol
     

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  5. Dary

    Dary Dary McGovern Staff Member

    Hi Beatthebandits

    Trading has been going fine, although the Euro Dollar has been a bit more volatile than I would like. That being said, one of my longest running Mean Reversion strategies on the Euro Dollar has had a solid month generating 162 pips profit so can't really complain. We are working on the ability to share trading strategies that can be directly imported into your timetotrade account so when that is ready, I'll share the strategy.

    With regards to trading the FTSE versus shares, currencies etc, most successful strategies can be classified as 'Mean Reversion' or 'Momentum' strategies and can be applied to any asset class. With Momentum strategies you are looking to identify a strong trending move early in the cycle and hold until the move is exhausted. I tend to focus heavily on Mean Reversion strategies, which comes down to the identification of outlier events where the price is likely to revert to a Mean.

    For example, when I am investing in stocks, I will look for a company with growth in historical earnings and forecast growth. I will then look to buy into the position when the stock is undervalued by comparison to its historical Price Earnings ratio. I then hold the investment until it has returned to fair value, should it take a month or many years be it at a profit or loss.

    When trading currencies I'm looking for the market to be oversold or overbought with a variety of ways of determining that using indicators, pivot points or candlestick patterns. I then open a position and wait for the price to revert to the Mean be it at a profit or a loss.

    When you distil both approaches, I am doing exactly the same thing - looking for an outlier event that offers the potential of a return if the value reverts to the mean. The core strategies are the same, therefore the art of trading is adjusting the parameters to maximise return for the given market.
     

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  6. That's it. My strategy for over 6 years on FTSE 350, and the odd AIM share, has been returning, month on month, minimum 10% compounding, of total cap. Usually, tops and bottoms on the weekly chart have sufficed, but do use the daily to keep picking up those regular 10 per-centers, even if that is a distance just back to a mean, sometimes against trend (but not often), quick tech 10%'s. Just cant get it to apply successfully to the currency spreads etc. Tried, with many adjustments, and have t conclude: longer term investment methods, even id successful, just cant apply to the shorter term markets, even on the lower time frames.
     

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