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Simple Mean Reversion

  • #141
  • Apr 30, 2018 4:41am Apr 30, 2018 4:41am
Quoting alphaomega
Hi, and thanks for stopping by! Regardless if you're new or old member of the forum, keep reading here and I promise you will not be disappointed! From my point of view this thread is the natural continuation of the thread "Higher Edge within a Single Candlestick” ...Range. The range is simply (high – low) for the current cycle. Mid - this is the middle of the range. Or, mid=high-(range*0.5); Or (high+low)/2; sqrt(t) - This is the square root of time. ... And I promise you that when...
Wow wow ... thank you for creating this great thread alpha + omega, the first and the last ...
Sqrt(t) is very interesting, but unfortunately i am weak in math ... like example on image below ... Need to finish some home works. so quite busy at the moment. Beginning by reading some of your great stuff is my first plan and try to get as much as i can using my weak brain ... The Point is, i am sure this will be very helpful for me ...
I know, my Cyclic daily jobs take up a lot of my time, so i can not participate much in this near future, but i will stop by every time i can and try to "combine" your idea with other ideas, i am sure it will give me more success ...
Best regards.
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  • #142
  • Apr 30, 2018 5:12am Apr 30, 2018 5:12am
Quoting newhope
{quote} Wow wow ... thank you for creating this great thread alpha + omega, the first and the last ... Sqrt(t) is very interesting, but unfortunately i am weak in math ... like example on image below ... Need to finish some home works. so quite busy at the moment. Beginning by reading some of your great stuff is my first plan and try to get as much as i can using my weak brain ... The Point is, i am sure this will be very helpful for me ... I know, my Cyclic daily jobs take up a lot of my time, so i can not participate much in this near...

Was that from Pythagoras ? He was one of the first traders of the famous Greek Drachme.
  • #143
  • Apr 30, 2018 5:43am Apr 30, 2018 5:43am
Here is an excel file, you can use for calculating the distances, at which point to enter a trade.

You have to enter in the beginning of the day :
a) The Open
b) The dailyrange = Average daily range over 20 days
c) alfa = a percentage . It is fixed at 10 % at the moment. This % is taken of the dailyrange.
==> ADR = alfa * dailyrange.

Per hour is calculated the lower range and the upper range.
Upper range = OPEN + ADR * SQRT(hour)
Lower range = OPEN - ADR * SQRT(hour)

This gives an easy worksheet for the day. Here you can quickly check where price has to be at a certain time
of day in order to enter a trade.

The current excel file has the data for gbpjpy of today. The open was 150.16 and the average daily range is 1.197 (119 pips).
alfa = 0.10

This results in a lower boundary of 149.74 at 12 o'clock. Price must be 149.74 or lower in order to buy this .
But it did not reach this level, so we do not buy at the moment.
Attached File(s)
File Type: xls SimpleMeanRev_v02.xls   14 KB | 795 downloads
  • #144
  • Apr 30, 2018 8:14am Apr 30, 2018 8:14am
Quoting VEEFX
{quote} ... "A trading strategy that purely relies on price:time series on just one chart (one pair and one timeframe) will not survive more than 3 years". 3 Years is somewhat arbitrary to eliminate the human luck factor and to incorporate discipline in execution with discretionary style. There is not a single automated strategy that can last for 3 yrs in retail forex that is based on one chart one pair one timeframe ..
VEEFX; there is one strategy that meets your criteria above; and it's been working forever; market making.

liquidity providers (including banks) have been doing it since the inception of the markets. their strategy only cares about current bid/ask, and upcoming news events (where they reduce their risk exposure).

Having said that; you do have a point in having a strategy not lasing more than 3 years. This is because to succeed in systematic trading; you need to adapt; and improve the strategies all the time. In 3 years time; the strategy is still running; but because of the improvements made; it is perhaps not regarded as the same strategy. The edge is still the same however. It is either:
- momentum based (aka trend following)
- mean reversion
- market making

CP for example; uses momentum. (tips: His strategy will NOT work on pairs other than GU)
  • #145
  • Apr 30, 2018 2:28pm Apr 30, 2018 2:28pm
VEEFX, this is for you.
Once I have prommissed to you,
to show you how to spot a range?
Can you recall that?
Unable to share a chart now.
Some smart wolves sniffing around here.

I will just simply describe it.

In a strong trend, the price does not brake previous/last top/bottom.
Range is opposite to that.
First range sign is a false break of an opposite top/bottom.
More of that follows shortly after.
You are in a range now.

I hope you will appreciate my honesty.
Maadik Hugiis. IQ 69.
  • #146
  • Apr 30, 2018 3:39pm Apr 30, 2018 3:39pm
Quoting VEEFX
{quote} Thanks MZ. I definitely remember and appreciate the honest answer. I have learnt a lot since I posted that question in your thread. What's your take on the 12 questions I posted earlier. My response is a resounding Yes to all the 12 questions. AO response is opposite of what my research tells me. As with everything in the market, it always depends on the trader, what they see and how they react. It is an essential element for market to exists I guess :-)
Most of your questions have unclear definition.
My initial assumption was that by win/loss ratio you mean gross profit divided by gross loss. Also known as profit factor. If this is the case then my answers remain as they are.

But if you mean percentage (%) of profitable trades, then the answers will be yes. BUT again, with the assumption that all trades have equidistant fixed stops and targets. Otherwise you will get different distribution.

However under this condition the reasons for the placement of the trades is irrelevant. Regardless of the strategy, IF you place random trades in all directions you will get random results. Period. (50:50)-cost. No escape from this!
  • #147
  • Apr 30, 2018 4:53pm Apr 30, 2018 4:53pm
Quoting VEEFX
{quote} What's your take on the 12 questions I posted earlier.
I have found, for myself, trading is a game of:

Tops
Center
Bottoms

Plenty of pips, when avoiding the Center.

Center is aligned with timing.

Everything Starts and Ends in the Center.

The only way to survive, in a long run, is to learn to avoid the Center.

The Market Makers want you to trade in the Center.

Center is their best interest and best friend...

This is quite practicle opinion... I hope it helps.

p.s. Everyone has to find the answer of “How?” for oneself’s.
Maadik Hugiis. IQ 69.
  • #148
  • Apr 30, 2018 5:17pm Apr 30, 2018 5:17pm
Quoting VEEFX
{quote} Thanks AO. My apologies for not being crystal clear. I wasn't referring to Profit Factor at all. Profit Factor is determined by the outcome of a strategy . I was purely referring to entry setups based on current market conditions at the point of entry relevant to the topic of this thread i.e. Reversion to Mean expects a market to revert from a OB/OS or whatever level the strategy targets with the expectation that reversion will proceed to it's final destination (i.e mean in this case). How you define levels or mean is irrelevant. I was also...
the six dimentions thingy is an over kill.

when you enter a trade; the market can go in the direction of your trade, against it, or dont move. 3 possibilities only.

keep it simple. once you open a position; exit at a profit, and if the market goes against you or nowhere exit at a loss. period.
  • #149
  • Apr 30, 2018 5:32pm Apr 30, 2018 5:32pm
Quoting VEEFX
{quote} Thanks AO. My apologies for not being crystal clear. I wasn't referring to Profit Factor at all. Profit Factor is determined by the outcome of a strategy . I was purely referring to entry setups based on current market conditions at the point of entry relevant to the topic of this thread i.e. Reversion to Mean expects a market to revert from a OB/OS or whatever level the strategy targets with the expectation that reversion will proceed to it's final destination (i.e mean in this case). How you define levels or mean is irrelevant. I was also...
Yes I agree.

It's even simpler than that!
Trading is just a sequence of binary choices (Bets) under different conditions.

For example:

if (trend == true)
choice 1 = bet on continuation;
choice 2 = bet on reversion;

if (trend == false)
choice 1 = bet on Up Trend;
choice 2 = bet on Down Trend;

And you always have choice 3, the safest bet - Do nothing and wait!

You can also trade exclusively based on expectations and fundamental information. Without technical analysis. But this is another story.
Lets just stick to the topic.
  • #150
  • Apr 30, 2018 6:04pm Apr 30, 2018 6:04pm
Quoting VEEFX
{quote} Thanks. Glad you agree and well said in bold. If you quantify all the binary possibilities, there is very little (if any) edge left for traders to exploit. Brief success will almost always follow with brief failure lol. The only option I have found is a combination of law of large numbers and law of averages (not average down) and with that said, I will exit and get back to the grind. My apologies for the distraction.
you are missing a point in the probabilities; consider the following scenarios:
1. EURUSD has moved up by 20 pips since the day open; what is the chance of the price going up or down? is 50/50
2. EURUSD has moved up by 150 pips since the day open; what is the chance of the price going up or down after that? it's certainly NOT 50/50

probabilities change over time; just like the roullette' probabilities change after a long number of plays (refer to CP's post on roullettes)

the point is to identify an edge. In the example by Alphaomega strategy; we use statistical edge. We calculate the average daily range; and enter when the price has exhausted its daily move (measured by the ADR)
  • #151
  • Apr 30, 2018 6:19pm Apr 30, 2018 6:19pm
Quoting alphadude
{quote} you are missing a point in the probabilities; consider the following scenarios: 1. EURUSD has moved up by 20 pips since the day open; what is the chance of the price going up or down? is 50/50 2. EURUSD has moved up by 150 pips since the day open; what is the chance of the price going up or down after that? it's certainly NOT 50/50 probabilities change over time; just like the roullette' probabilities change after a long number of plays (refer to CP's post on roullettes) the point is to identify an edge. In the example...
Some people will argue that this is a classic case of Gambler's fallacy

However, I'm not completely convinced about the validity of this theory in the context of trading.
  • #152
  • May 1, 2018 2:02am May 1, 2018 2:02am
Quoting alphaomega
{quote} Some people will argue that this is a classic case of Gambler's fallacy However, I'm not completely convinced about the validity of this theory in the context of trading.
that is the beauty of Forex compared to Stocks; it tends to have more rubber band effect. EUR/USD for example; never doubles in value; nor drops 50% of its value. It will remain within a reasonable value for a long time.

compare that with S&P price, or Facebook stock price; which tends to go upward over time.

A Forex pair; is already a pair of two currencies; (EUR, and USD), you are trading the difference (aka the spread, in pairs trading terminology). Statistically; you do have an edge already; it will mean revert more than trend.

You just have to cater for mean drift from time to time; due to macroeconomic/news events. During those times; stay aside if you are not in; or exit if you are in a position.
  • #153
  • May 1, 2018 10:24am May 1, 2018 10:24am
Quoting Riverstar
{quote} How is it possible that your average profitable trade, with a lotsize of 0.01, is $ 11.64 and your losing trade - $15.48 In general, the width of a trade is 25% to 50% of the daily range. That means, with your results, you have a daily range of 232 or something like that. But in reality the daily range is much smaller. For eurusd the ADR = 80 pips. So, profitable trades should be between $2 and $4 on average.
Your are right,

except that you have missed the part, of that being a multi currency back test for 3 pairs at the same time (EURUSD,USDJPY,USDCHF)...which should clarify your questions.
The biggest risk is not taking a risk.
  • #154
  • May 1, 2018 11:16am May 1, 2018 11:16am
Quoting alphadude
{quote} you are missing a point in the probabilities; consider the following scenarios: 1. EURUSD has moved up by 20 pips since the day open; what is the chance of the price going up or down? is 50/50 2. EURUSD has moved up by 150 pips since the day open; what is the chance of the price going up or down after that? it's certainly NOT 50/50 probabilities change over time; just like the roullette' probabilities change after a long number of plays (refer to CP's post on roullettes) the point is to identify an edge. In the example by Alphaomega strategy;...
correction to my previous comments above;

I just did a statistical study on EUR/USD and GBP/USD; and found out that:

regardless of the current price in relation to the day open; the probability of the price moving in the same direction; or retracing; is indeed 50/50

in other words; whether the market moved by 20 pips above the open; or 80 pips, or 100 pips; the probability of the market continuing in the same direction; or reversing; remain at 50/50.

the study I performed is from 2015 to date; using daily candles; and also using London session candles.
  • #155
  • Edited 2:07pm May 2, 2018 10:42am | Edited 2:07pm
Quoting Riverstar
{quote} Was that from Pythagoras ? He was one of the first traders of the famous Greek Drachme.
Hi Riverstar,
Above of all, sorry for not explain it clearly, and thank you that you have tried to give me a clue, but ... it is not about pythagoras. My bad is not to read alpha's posts clearly before i ask, so this leads to misunderstanding ... ... Trying to read and Understand the contents first, then i will ask again if i find some thing not clear ... Time is limited at the moment, so can not explain it much, hope you can understand it ...
  • #156
  • May 2, 2018 10:52am May 2, 2018 10:52am
Quoting alphadude
{quote} correction to my previous comments above; I just did a statistical study on EUR/USD and GBP/USD; and found out that: regardless of the current price in relation to the day open; the probability of the price moving in the same direction; or retracing; is indeed 50/50 in other words; whether the market moved by 20 pips above the open; or 80 pips, or 100 pips; the probability of the market continuing in the same direction; or reversing; remain at 50/50. the study I performed is from 2015 to date; using daily candles; and also using London session...
Maybe you should extend your statistical study to a few more years back, because it is a little flawed in my opinion. If price travels 20 pips is not the same with it traveling 40 pips and is even different of 100 pips.
The distinction between them is a very thin line and if not looked at it carefully might at some point resemble Gamblers Fallacy.
The reversion to the mean or diverging away from the mean is pretty complex and should be treated as such.
There are simpler methods of trading for those who do not posess very well established statistical, mathematical and trading knowledge.
  • #157
  • May 2, 2018 11:05am May 2, 2018 11:05am
Hi All!

I am not sure i understood this strategy, however i will write as i get it:
The heart of the strategy is the assumption that prices tend to reverse to mean price. Therefore most of the trades are profitable.
The heart of the problem with this strategy is the bad days, when you open many trades and they all go to loss, which make a very great loss.
But if you take off the greed from the game, and never open too many trades on one day, you will still be profitable on most days, and also the bad days will not be so bad.
For example, you can decide that in your first trade of a day you risk only 1% of account, second trade another 1%, third trade 1% and that's all for this day. On the worst day you will lose 3%. If there are many days of profit, this will not destroy your profitability.

Regards,
Avraham
  • #158
  • May 2, 2018 4:03pm May 2, 2018 4:03pm
hi Avraham,
OP in the second strategy is talking about only taking 2 trades:
buy on level 4 and 5 below medium, sell on level 4 and 5 above medium.
stop losses on level 6 and 7.
so even better with only 2 trades.
  • #159
  • May 3, 2018 1:51am May 3, 2018 1:51am
Quoting VEEFX
{quote} "whether the market moved by 20 pips above the open; or 80 pips, or 100 pips; the probability of the market continuing in the same direction; or reversing; remain at 50/50." 100% true. I ran this test last year with 12 months worth of data spanning from 2016 into 2017 across all 9 timeframes (whatever max MT4 candles can handle in their charting history per timeframe) and across some 72+ pairs running over 85Million calculations via a mql script that ran recursively for over 5 days. I can say this...It's not just direction but also trend...
''Trade Small, Trade Often, Cut your Losses Short, Hold Your wins just a tiny bit longer (via Law of Averages and Large Numbers) is the only 'edge' I could quantify from the market.''

Perfect advice.

I would also add Trade What You See, Not What You Think.
  • #160
  • May 3, 2018 5:32am May 3, 2018 5:32am
Quoting VEEFX
{quote} "whether the market moved by 20 pips above the open; or 80 pips, or 100 pips; the probability of the market continuing in the same direction; or reversing; remain at 50/50." 100% true. I ran this test last year with 12 months worth of data spanning from 2016 into 2017 across all 9 timeframes (whatever max MT4 candles can handle in their charting history per timeframe) and across some 72+ pairs running over 85Million calculations via a mql script that ran recursively for over 5 days. I can say this...It's not just direction but also trend...
the scope of my study was limited to mean reversion of the daily range to the end of that daily candle.

it does not mean there is no edge elsewhere. keep looking you are in the right direction
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