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A Simple Mean Reversion Strategy

  • #41
  • Aug 15, 2023 3:04am Aug 15, 2023 3:04am
Here i applied Zig Zag and it has more neater entries !!!
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  • #42
  • Aug 15, 2023 3:37am Aug 15, 2023 3:37am
Due to high correlation between EUR and GBP, this strategy could work. The hard part is to hold your trades when the correlation breaks. The money management is particularly important with this strategy.
  • #43
  • Aug 15, 2023 4:50am Aug 15, 2023 4:50am
A statistical look at the spread (gap) vs theta (speed) would be interesting.
Data can be analyzed daily, weekly and monthly.
Max gap, max speed, max acceleration.

Avoiding entries when SMA Slope is accelerating could improve the system.
No guts, no glory
  • #44
  • Aug 15, 2023 8:14am Aug 15, 2023 8:14am
Quoting dokopy
So the system works with a $100 account and doesn't work with a $1,000,000 account? Or is there any value how big of an account do I need for 1 lot trades? "I will dive deep into this later but what it essentially boils down to is this, you need volume to consistently make stable returns. Not volume in size, but volume in deals. This means you must do 2 things: Stay Small Trade Often A short example to illustrate the point. Imagine a grocer who is selling tomatoes. Based on current market demand, they estimate they can sell $100 worth of tomatoes...

For 99% of people, it will work on any account size depending on your broker. Smaller accounts will be harder depending on your broker because you will probably be forced to take on more risk than you should. Oanda is the only broker I know where size (on the small end), won't affect you because they will let you buy/sell literally a single unit of currency.

If your smallest lot size is 0.01 (1000 units), you will want to avoid small time frames, and definitely won't want to enter while spreads are small. We always hit bad runs where our first few entries are DOA, so if you go too big, too fast, it will be really hard to offset the early positions.
ri · skuht
  • #45
  • Aug 15, 2023 8:27am Aug 15, 2023 8:27am
Quoting oyaks
Here i applied Zig Zag and it has more neater entries !!! {image}
ZigZag repaints so it will look super good after the fact but using it in the present can be dangerous.
ri · skuht
  • #46
  • Aug 15, 2023 8:29am Aug 15, 2023 8:29am
Quoting abokwaik
A statistical look at the spread (gap) vs theta (speed) would be interesting. Data can be analyzed daily, weekly and monthly. Max gap, max speed, max acceleration. Avoiding entries when SMA Slope is accelerating could improve the system.
I like how you think! Lots of stuff similar to this will be coming down the pipe soon!

Wish there was more time in a day haha
ri · skuht
  • #47
  • Aug 15, 2023 10:00am Aug 15, 2023 10:00am
it’s a pretty logical concept - if price can reach over bought conditions (extreme trend strength) while below the 200 EMA - then price was very oversold - and a natural rebalance to fair value is due - safe bet

this is using Ema based rsi on a length of 8

i will delete if this doesn’t align with OPS concepts

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Can't go broke making profit
  • #48
  • Aug 15, 2023 10:14am Aug 15, 2023 10:14am
Quoting Riskcuit
{quote} ZigZag repaints so it will look super good after the fact but using it in the present can be dangerous.
Yes the Repaint Nature of zigzag is the strength because rarely zizzag obey its first leg, the zizzag indicator i used just prints me the repaints prints, so all eyes on the first print , as shown in this pic
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  • #49
  • Aug 15, 2023 10:21am Aug 15, 2023 10:21am
Quoting FireScape
it’s a pretty logical concept - if price can reach over bought conditions (extreme trend strength) while below the 200 EMA - then price was very oversold - and a natural rebalance to fair value is due - safe bet this is using Ema based rsi on a length of 8 i will delete if this doesn’t align with OPS concepts {image} {image}
It's a good entry method for returns you may want to add to but again, the size of the spread and the goal of going for a very high hit rate can be concerning. Mainly because we don't want to assume any one entry will be profitable, as this will cause us to take on too much risk for that entry.

You really want to assume the opposite. The smaller the spread, you should assume there is a higher probability of this entry going into drawdown than if it was larger. And the smaller the spread, the larger that drawdown can be.

You want to stay small, know that you are likely to hit drawdown, but you are small and ready for it so you can build your position, and average down your entry, rebalancing the position so it will be profitable once it returns to fair value.

This is also why we use a MA, because at some point, the price has to return whether or not you are in the money so you technically can't average down to infinity.

There are a lot of ways you can approach the averaging down, and I will share how I typically approach along with the data on why I use this approach later. Currently working on the best way to illustrate everything I have talked about previously regarding using models, knowing their errors and how we take advantage of that.

Then will dive deeper into managing averaging down in addition to the concept of "rolling the trade" (essentially the same concept as rolling over your strike or duration in an options trade).
ri · skuht
  • #50
  • Aug 15, 2023 10:22am Aug 15, 2023 10:22am
Quoting oyaks
{quote} Yes the Repaint Nature of zigzag is the strength because rarely zizzag obey its first leg, the zizzag indicator i used just prints me the repaints prints, so all eyes on the first print , as shown in this pic {image}
As long as the re-painting is clearly acknowledged and accounted for, I like the seasoning!
ri · skuht
  • #51
  • Aug 15, 2023 10:36am Aug 15, 2023 10:36am
Quoting Riskcuit
{quote} Out of this position now. Starting to build some in AUD/NZD, GBP/NZD, EUR/NZD, and USD/CAD
Interesting idea to start small and with decent spread, in hopes of moving back to MA 200. You should post how you managed that AUDUSD long trade, entries and exit.
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  • #52
  • Aug 15, 2023 10:48am Aug 15, 2023 10:48am
Quoting driven18
{quote} Interesting idea to start small and with decent spread, in hopes of moving back to MA 200. You should post how you managed that AUDUSD long trade, entries and exit. {image}
This is exactly why you need to stay small. Additionally, is why you don't want to take every entry signal. You need to weigh the risk. The 2nd and 3rd entry signals mark, provide almost no reward to taking on the access risk... If you were using a fixed lot size so would triple your risk on those entries for almost no cost average advantage. This will only make it require more capital to cost average in the future.

After your initial first entry, you don't want to add to the position till the spread between that entry and the fair value is essentially 0 or negative.

The only reason you ever take on more risk is because it significantly increases your POP. If it barely moves the needle, it's almost certainly excess risk that will not payoff.
ri · skuht
  • #53
  • Aug 15, 2023 10:52am Aug 15, 2023 10:52am
Quoting Riskcuit
{quote} It's a good entry method for returns you may want to add to but again, the size of the spread and the goal of going for a very high hit rate can be concerning. Mainly because we don't want to assume any one entry will be profitable, as this will cause us to take on too much risk for that entry. You really want to assume the opposite. The smaller the spread, you should assume there is a higher probability of this entry going into drawdown than if it was larger. And the smaller the spread, the larger that drawdown can be. You want to stay...

thanks for the reply, I guess my brain is stuck on the other entry model of trying to produce the highest strike rate possible while protecting the account from as much DD as possible. It’s a fundamental shift from how I trade and would have to re program my brain haha

i may open another thread that looks at this methodology - thanks for opening my eyes to different way of viewing the market
Can't go broke making profit
  • #54
  • Aug 15, 2023 11:00am Aug 15, 2023 11:00am
Quoting FireScape
{quote} thanks for the reply, I guess my brain is stuck on the other entry model of trying to produce the highest strike rate possible while protecting the account from as much DD as possible. It’s a fundamental shift from how I trade and would have to re-program my brain haha
Yeah, it will probably be a pretty big change for a lot of people who try it out. It's like that by design though. We aren't trying to "snipe" entries, but instead are playing a larger game and letting CLT do the work for us. This is also why it's important to stay small and trade often.

If you don't, CLT can't kick in, even if you have a strategy that is +EV mathematically.

The trading should also be very slow and calm if that makes sense. Even when you are in a bad drawdown. If you're small, it shouldn't matter too much and should be relatively easy to trade out of/offset with other occurrences in other products. All you are doing is managing risk while letting the model, and it's assumptions and errors drive the profits.
ri · skuht
  • #55
  • Aug 15, 2023 12:07pm Aug 15, 2023 12:07pm
Quoting Riskcuit
{quote} This is exactly why you need to stay small. Additionally, is why you don't want to take every entry signal. You need to weigh the risk. The 2nd and 3rd entry signals mark, provide almost no reward to taking on the access risk... If you were using a fixed lot size so would triple your risk on those entries for almost no cost average advantage. This will only make it require more capital to cost average in the future. After your initial first entry, you don't want to add to the position till the spread between that entry and the fair value...
How did you judge to skip marked entry points 2 & 3?
Is there an objective way to determine it?
  • #56
  • Aug 15, 2023 12:24pm Aug 15, 2023 12:24pm
Quoting Riskcuit
{quote} This is exactly why you need to stay small. Additionally, is why you don't want to take every entry signal. You need to weigh the risk. The 2nd and 3rd entry signals mark, provide almost no reward to taking on the access risk... If you were using a fixed lot size so would triple your risk on those entries for almost no cost average advantage. This will only make it require more capital to cost average in the future. After your initial first entry, you don't want to add to the position till the spread between that entry and the fair value...
Explain your meaning of calculation and use of fair value for AUDUSD or give other example or ""Forever hold your peace"
  • #57
  • Aug 15, 2023 1:01pm Aug 15, 2023 1:01pm
Quoting driven18
{quote} Explain your meaning of calculation and use of fair value for AUDUSD or give other example or ""Forever hold your peace"
please re-read 2nd post in thread. Fair value is ma. Spread is distance between current price and/or entry price to fair value.
ri · skuht
  • #58
  • Aug 15, 2023 1:04pm Aug 15, 2023 1:04pm
Quoting Merka
{quote} How did you judge to skip marked entry points 2 & 3? Is there an objective way to determine it?
yes, I pretty much explained it above. The pip distance between those 3 entries is all very small. Theta would eat up that distance between each candle pretty quickly. Additionally. If you add there it will be more capital intensive to average down later on should market continue to drift against you.

it’s not with the risk as any increase of potential profit from averaging down will be quickly eaten by theta.

This is why you typically don’t want to be adding until there is basically no potential profit for your first or average entry price. It will protect you from trading too aggressive and keep your risk small so you can weather the larger moves.
ri · skuht
  • #59
  • Edited 2:09pm Aug 15, 2023 1:12pm | Edited 2:09pm
Quoting Riskcuit
{quote} please re-read 2nd post in thread. Fair value is ma. Spread is distance between current price and/or entry price to fair value.
Your first entry on AUDUSD was 50 pips below Fair Value, does next entry needs to be 100 pips below Fail Value? Can you quantify when it is beneficial to enter the next trade? Do not "theta us ", just explain 2nd entry as it relates to AUDUSD chart.
  • #60
  • Aug 15, 2023 2:15pm Aug 15, 2023 2:15pm
Quoting driven18
{quote} Your first entry on AUDUSD was 50 pips below Fair Value, does next entry needs to be 100 pips below Fail Value? Can you quantify when it is beneficial to enter the next trade? Do not "theta us ", just explain 2nd entry as it relates to AUDUSD chart.
I did explain it, but may be easier to show it.

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I said: "This is why you typically don’t want to be adding until there is basically no potential profit for your first or average entry price."

I have marked the same entries but have added a horizontal line showing where first entry would be. Once the MA crosses the horizontal line, the theta has eaten up the entire profit opportunity for the first entry.

Notice how on entries 2 and 3, if price returned to fair value, the FIRST entry would still be profitable. There is no need to add risk on these entries because you will be paid off for current risk should fair value returns. This is also the case for the 4th entry, but the profit would be tiny, so that would make sense to add there. And for the 5th entry, if the price returned to fair value, the first entry would be a net loss at that point (theta ate the entire opportunity). There is no need to add excess risk if you will be paid out should price return to fair value... Adding the excess risk at entries 2 and 3 would reduce your cost basis by nearly nothing.

By strategically averaging down, you can extend your potential profit and defend against theta.
ri · skuht
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