There are hardly any guaranteed edges in Forex trading - but here's one that will never fail.

WalletInvestor

Member
76 23
There is a problem with returning to average - it is eventually a self fulfilling prophesy, but the problem is it can take a lot longer than you think.
What about a casino roulette wheel? Over thousands of spins it will also 'return to average'. Lotto numbers drawn will also do the same but you can't build a strategy around it.

I agree it can take longer than one thinks, you can't predict the future, after all. But I think it is not correct to compare price movements to roulette or lotto as price movements are never completely random, therefore the things that affect each are completely different.
 
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trendie

Legendary member
6,551 1,137
An example of a trade closed yesterday on the 5 min EURCAD chart trading back to the 800ema. Price had been away from the 800 ema for a statistically relevant time and at the distance from the mean and at the rate of change of the mean the overwhelming probability was that price would return to the mean. ...

The EMA value used determines whether the price is above the EMA and you're looking for a short, and a different EMA, on the same chart, may be below the price, and you're looking for a long.
So, the EMA chosen sets your expectations of a long or a short trade?

PS: I think I know why I am going to like this thread! :)
 

ChartSmart

Junior member
11 6
The EMA value used determines whether the price is above the EMA and you're looking for a short, and a different EMA, on the same chart, may be below the price, and you're looking for a long.
So, the EMA chosen sets your expectations of a long or a short trade?

PS: I think I know why I am going to like this thread! :)
Yes, on any EMA the trade will always be back to the ema itself. So if price is above the ema the trade will be short and if price is below the ema then the trade will be long. The reality is that without the data its impossible to know which ema mean reversion is most likely to happen on. In your example above perhaps price must first move back to the shorter ema before going back to the longer. This is completely normal and not a problem, but the data will clarify which trade is a stronger set up
 

ChartSmart

Junior member
11 6
Does price return to average or does the average move to return to price?
Yes, great question! The answer is a bit of both. It is for this exact reason that we need to know the rate of change of the EMA when calculating probability of mean reversion
 

Trader333

Moderator
8,605 932
How are you making it different from just using the EMA on its own as the idea of an EMA is that the front end is weighted more to factor in the rate of change anyway ?
 
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ChartSmart

Junior member
11 6
How are you making it different from just using the EMA on its own as the idea of an EMA is that the front end is weighted more to factor in the rate of change anyway ?
The ema on its own gives you zero useful data. How long has price stayed away from the ema on average over the last 250 000 bars of data. What was the longest excursion? How does the current excursion compare to the average and the longest excursion. At the current ROC where is the current excursion projected to end in relation to previous excursions? What is the probability of success considering all these factors. The ema is simply the target - we need to extract the data to understand the DNA of the instrument - how does price behave in relation to its average in the past - this will allow us to make assumptions of how it might behave in the future
 
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DallasSteve

Member
58 0
Doing some quick back testing there does appear to be an "edge" in this idea of reverting to the average. But the gains in my tests so far are in the range of 1 pip before spread, which means the broker would need to offer very low spreads and commissions. Generally that's not available to US traders. Any suggestions/ideas for trading a system like this from "the land of the free"?
 
 
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