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A Simple Mean Reversion Strategy

Following your thread with interest, RC.

I noted that in your first post you mentioned that "Theta is almost always working against you. As it does though, you will typically have the opportunity to average up. Never average down even if you can. Otherwise you end up like the tomato seller buying $500 of tomatoes when you can only offload a $100 worth." - You mentioned about averaging up, but so far we've only seen discussion around averaging down. Do share your thoughts on this when you have time.

Cheers.
Quoting carddard
Following your thread with interest, RC. I noted that in your first post you mentioned that "Theta is almost always working against you. As it does though, you will typically have the opportunity to average up. Never average down even if you can. Otherwise you end up like the tomato seller buying $500 of tomatoes when you can only offload a $100 worth." - You mentioned about averaging up, but so far we've only seen discussion around averaging down. Do share your thoughts on this when you have time. Cheers.
thanks for pointing this out! This was a typo, was probably thinking about being short so we would be cost averaging to raise your average entry.

you never add to a position when it would move your average entry closer to fair value.
ri · skuht
Quoting Riskcuit
{quote} thanks for pointing this out! This was a typo, was probably thinking about being short so we would be cost averaging to raise your average entry. you never add to a position when it would move your average entry closer to fair value.
Thanks for clarifying RC.
An additional question - What are your thoughts on lot size as your add to your entries? (Same lot size vs increasing lot sizes as your scale in)
This amazing strategy will work for crypto pairs via spot trading with no leveraging , i think so !!!
Quoting Riskcuit
{quote} thanks for pointing this out! This was a typo, was probably thinking about being short so we would be cost averaging to raise your average entry. you never add to a position when it would move your average entry closer to fair value.
But on this example you shown before you are just talking about avereging down (adding to loosing position).
Did I understand correctly?
https://www.forexfactory.com/attachm...7?d=1692126922
This is an interesting example of when Theta eats your profit. Chart is GBPUSD 1 min.

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Well I have been using this strategy for about 6 months. I have actually seen videos of KOF on youtube and made a research myself . I have found scientific researches which are made over price actions of many asset group including stocks,fx, commodities etc.

It has been proven that the market returns to median. In this case median is calculated by everyone differently. After screening many different time frames I have seen that it works best with 1m and 5m. I have seen during my trading days during last 6 months that you have to adapt this strategy everyday based on market news, volatility and sentiment. On data light days, the deviation from the median is about 10-20 pips. It can be extended till 50 pips. On important data days deviation from median is generally between 50-100 pips. In this case you make your plan and your risk management accordingly. %99 works and %1 human error . Lost no single trade for the last 6 months thanks to this strategy.
Quoting Mic_FX
This is an interesting example of when Theta eats your profit. Chart is GBPUSD 1 min. {image}
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Quoting Mic_FX
This is an interesting example of when Theta eats your profit. Chart is GBPUSD 1 min. {image}
It doesn't work like that. You add a new position only when the EMA 200 absorbs all the profits from the first position.
Quoting Mic_FX
This is an interesting example of when Theta eats your profit. Chart is GBPUSD 1 min. {image}
@Riskcuit
How do you manage situation like this?
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.
Below are max spread (gap) between SMA-200 and price action over a period of 3 to 8 years on different pairs. I hope this data can be useful for the system users.


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Edit : updated image to correct figures. Values are in pips.
No guts, no glory
Quoting Merka
{quote} But on this example you shown before you are just talking about avereging down (adding to loosing position). Did I understand correctly? {image}
Yes, I believe so, whenever you "build" your position, you are adding risk and moving your entry further away from fair value.
ri · skuht
Quoting tarzon06
{quote} It doesn't work like that. You add a new position only when the EMA 200 absorbs all the profits from the first position.
I think that is the one minute, mean reversion strategy being played out, as promoted by the "King of Forex" on Youtube etc. His idea of "fair value" is the 20MA I think and ultimately the 50 and the 200 depending on price action. Risk managed by only adding a new position when an MA catches up with the previous candle.
Wouldn’t it make more sense to short when the average price is getting smaller or in other words when the 200 MAs slope is negative? So you could have shorted that spike for example.
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enjoying the thread thanks Riscuit
I am wondering what kind of return on account do you get doing this since you can only risk bits at a time ,?
Quoting abokwaik
{quote} Below are max spread (gap) between SMA-200 and price action over a period of 3 to 8 years on different pairs. I hope this data can be useful for the system users. {image} Edit : updated image to correct figures. Values are in pips.

Hello abokwaik,

May i know where you got this data? Any chance you can share, would like to conduct more research on this.

This helps alot in opening reversal trades, managing risk and controlling lot size

Thanks,
Hello all.
I would like to share my thoughts on this subject.
I believe that the most important factor in having success with this strategy is the spread (in the way that RC described it).
In order to open a position the spread must be at a minimum price.

So you would ask how can soneone decide about what this minimum should be. I would calculate it based on ATR or in percentage of price change. Otherwise I would calculate the maximum spread during the last x candles and the minimum spread that I must have would be a percentage (eg 95%) of the maximum calculated spread.

Adding RSI indicator to these criteria would potentially increase the possilility of win. But there are so many other factors that are of very high importance in order to create a winning strategy like where to put the stop loss, take profit, trailing SL. Would you close the orders in a certain lvl? (eg if RSI goes to 50)?

Many questions that only programming and thorough backtesting could answer.
EURUSD Daily almost back to the 200MA. Not a huge loss from theta (rising MA) after its little excursion. Around 100 pips, assuming it continues on its merry way!

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You need to enter in chop conditions.

So the speed is important. The faster it hit the minium "spread" the better. Dont want a long slow trend.
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.
Hi,
I made a bit of stats on A/U H1. Nothing very surprising.
- The max gap is approx. 1200 pips (8 oct 2008).
- Theta is correlated to the spread. This makes sense because of the lag of a moving average (distance to the MA is the trend times the lag).
- The curvature of the ema200 is also proportional to the spread. Also makes sense since an EMA corrects proportionally to the distance.

From this you easily conclude that the safer the less premium and vice-versa. A tradeoff would be to take a trade when the spread is wide but the slope is decreasing; what numerous traders would call divergence trading.

I also made some stats on the swings. Again no epiphany.
- The contrarian swings a slower and shorter than the swing with the trend.
- The most likely speed of a contrarian swing is ~5 pips/bar. (not the average because the histogram is skewed)
- The most likely move of a contrarian swing is 50 pips. This implies that a bigger spread will most likely not be recovered is a single move but a zigzag.

Using this stats one can project (blue dotted line) the EMA200 (black) and project (orange arrow) where the price and EMA200 should meet then draw the expected price (green line). I added a few orange arrows rising 5 pips/bar over upswings to show how good/bad the approximation is.

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No greed. No fear. Just maths.
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