Forex Mean Reversion?

dave114a

Member
51 1
OK so I have received a couple of emails about this system now but can find very little on it.

Forex Mean Reversion

I guess the premise is as the name suggests 'Mean Reversion' - I've carried out a bit of research into this and it does look plausible.

Does anyone have any thoughts on the system/ or a potential strategy using this trading method?
 
Last edited by a moderator:

Rhody Trader

Senior member
2,620 265
Mean reversion is just one of the two primary ways people trade. They either follow trends (momentum) or play ranges (mean reversion), generally speaking.
 

NVP

Legendary member
37,535 1,988
2 ways to trade anything......

Trade the Trend
or
Trade the Fade

welcome to the second system .......and good luck calling the tops and bottoms
N
 

jw1981

Junior member
25 2
2 ways to trade anything......

Trade the Trend
or
Trade the Fade

welcome to the second system .......and good luck calling the tops and bottoms
N

I've been using this method for over a month now and did a bit of testing. Overall, the system looks robust but is more tuned to swing trading (H4 works best). Anything lower than that, it is most likely to lose you money. Using the system on a 15 min. chart is a trade killer for sure.

On the H4, i'm using it with other indicators (trend) so as to identify if price does reverse at the bottom and the tops. My suggestion would be to set up a price alert for the extremes so you don't have to keep checking the charts all the time.

Last week USDJPY was kind of choppy but managed to make some good pips (closed the trade earlier than reaching the median line). This week, EURUSD is heading towards to the bottom so a potential long trade is in store.

I have been searching the net for this method, but most of the conversation seems to end with 'have you tried this'. It would be good if others who use this method could come forward and chip in with their ideas and trade set ups.
 

Trader333

Moderator
8,599 931
As others have said, you first need to determine what mode, (ie trending, range bound or whipsawing) an instrument is in for it to work. This approach will not work for instruments that are trending.

Do you know what approach is being used to determine when a mean reversion is likely to happen ?
 

jw1981

Junior member
25 2
As others have said, you first need to determine what mode, (ie trending, range bound or whipsawing) an instrument is in for it to work. This approach will not work for instruments that are trending.

Do you know what approach is being used to determine when a mean reversion is likely to happen ?

Yes, you are right in stating that it won't work when price is already trending (Ex was the USDJPY which has been in an uptrend for quite a while and the indicator kept giving false signals) So using the indicator by itself is not a good idea. Price tends to move beyond the upper and lower bands (designated entry points). While the stop levels mentioned by the indicator seem quite large. On the other hand, a conservative stop loss would be easily hit before price reverses again.

I had better success using this indicator along with linear regression indicator (LSMA indicator) and plotting fib levels on the chart.

I use this method to trade 8 fx pairs only where swaps on long is positive so I earn some more when trades are kept open for a few days in a row.

Enter a trade when price is near the lower or upper bands and wait for the LSMA to indicate the change in direction with attention to nearby fib levels.

I'm still in the nascent stages of exploring this indicator so feedback/suggestions would be welcome.
 

jw1981

Junior member
25 2
Do you know what the indicator is that is being used ? or what it consists of ?

From the looks of it, seems like some kind of bands. I tried using bollinger bands to replicate this but of no avail. The median line definitely is a moving average for sure (60day applied to median price).

Not sure what the other 4 bands are calculated from.
 

dave114a

Member
51 1
Yes its bollinger type bands. I took the plunge and got the indicator. It's pretty cheap and I find it usfeul to help reinforce my other trading decisions.
 

sr100m

Junior member
11 0
indicator settings

it's a keltner_channel.mq4 (not standard in metatrader - can be found online)

put two keltner channels on chart

settings
ma period60
ma mode and ma price both 0
atr period 60
K is 3 on one of the indys for the inner band and 6 on the other indy for the outer band
 

alexaherself

Established member
560 149
Prices will "revert to the mean" if they move a distance and then consolidate there, simply because the "mean" will eventually catch up with them.

Indicators of this kind can be a little misleading.

With Bollinger bands, for example (similar principle), a price can "move" from touching one of the bands to the SMA (middle line) because of the movement of the bands, rather than the movement of the price. You can buy when the price touches the lower band and sell when it touches the midline (or even the upper band) and still make a loss on the transaction.

It's all too easy to imagine that there must have been a significant change in price when there's been a "reversion to a mean", but it isn't necessarily so. In the same way, prices can move from above to below a moving average because of movement of the moving average, as it catches up with "what happened before", rather than because of movement of the price itself. "Just saying ...".
 
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