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

[Trader333]

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 ?

 

[ChartSmart]

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

 

[DallasSteve]

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"?

 

[Pat494]

" Land of the free" ?
That's a laugh, the crooks of US gambling won't even let US citizens play poker on foreign websites.
As for double zero on the roulette wheel, that is a real con. One zero European style is bad enough !

 

[wmram]

I think that if you allowed gambling in the US, a large percentage of those gamblers would destroy themselves. Look at the failure rate for short term market traders. "Land of the free" yes but with boundaries for your own good even if you don't see that way. Someone like you might well be able to handle it, but think about all those who would blow up.

 

[DallasSteve]

But it's OK for the government to sell lottery tickets that are even a worse bet, with no limit to how much the foolish can waste on the tickets. And our US government places controls on Forex trading which have the effect of driving the small traders to brokers that charge a higher spread/commission and drain their accounts even faster (to 'protect' the weak). And don't get me started on medicine. You can't buy the drug you need without first paying $100 or more to a doctor to get a piece of paper, here in 'the land of the free' and the home of the cowards. That's why medicine cost is out of control: because government is serving the interests of the doctors and drug companies.

 

[wmram]

In the US if you are an elected leader, you're under constant pressure from media, opportunist, scoundrels, etc. so you work with what you have to work with. I certainly cannot explain the inconsistency in the various laws that are enacted on the federal, state, or city level, but I suspect that most of those laws are the result of a fair amount of bargaining. That said leverage 100x,200x, or more in forex market is going to help most of the people that want it.

 

[brfrexloid]

But how long will it take for those average to be attained can never be estimated. So that then doesn't really help.

 

[Henow1969]

What about 2021?

 

[tomorton]

Price always returns to it's average.

Always.

If this is true and we can figure out when it is most likely to happen, we have a strong edge on market behavior that has always and will continue to always play out

So what needs to be considered?

Well a lot of traders will tell you distance from the average is key. So if price is much further away from the average than normal, it will probably return to it fairly soon.

Of course this is nonsense. Complete and utter drivel.

On its own, distance from the average tells us nothing apart from the fact that we are in a strong trend or maybe experiencing a significant news event.

A better measure than distance travelled from the average is TIME spent away from the average compared to how long price normally spends away from the average.

Remember, if price always has to return to it's average, which it does, then the longer it has spent away from the average compared to normal, the higher the probability of it returning to the average sooner rather than later becomes.

This combined with distance from the average now starts to give us a very powerful indication of whether price is likely to return to the average sooner rather than later.

The last element which I won't go into to much detail as it starts getting a bit mathsy is the Rate of Change of the average. We can discuss this later on, but it is critical to understand

So, if you are trading mean reversion back to the average of price remember - distance from the average is a start, but TIME spent away from the average is a far more useful concept to master.

Once we know price has spent to much time away from it's average we can start initiating positions to profit from it's return to the average.

Remember, price always returns to its average. Any average. Always.

All the best

JustinView attachment 289307View attachment 289308View attachment 289309View attachment 289310View attachment 289312

Just need to give you some credit for this principle, which I didn't do adequately last year - time away from the MA.

My principal set-up component is the slope direction of the 50EMA. Obviously, if the slope is consistently upwards, that means that price is consistently above the MA and because its a 50-bar period, it has been up there for some time, probably about 20-25 days.

I also look at other MA / time-related metrics such as the total of consecutive recent weekly closes above/below the 50EMA.

 

[McQuant]

Indeed, the mean reversion rocks!

Return to the mean is a concept that fits my trading personality, but not in a way described in this thread.
My trading concept is based on finding cointegrated assets (2, 3 or even more), calculate their spread, and zScore, hedge ratios and spread's half-life and then trade the spread back to the mean. By combining multiple assets (like FX, EQ Indexes, Commodities, ETF/Stocks etc.) one creates a new synthetic asset in form of zScore and trading its constituents based on calculated hedge ratios rather than trading one particular asset waiting for its price returns back to some 500-ish whatever MA.
I'm trying to do it algorithmically using IBKR data, Python and frankly, there is still a lot of work for me to do.

Will it be ever finished? I do not know, but hopefully...
As it does not make me any money yet I can only work on it in my spare time, but who knows how further it goes...

 

[trendie]

I must admit I am wracking my head over this. I don't get it.
To be pedantic, Price does not revert to average, the average can be seen as a sentiment indicator of Price. The average chases Price in a smoothed way.

All things being equal, and the markets being stable, then Price will surely gravitate towards the average.
But, a sentiment shift, causes Price to find a new level/range to move in, and the average flows to it.
If the sentiment shift is wild enough, no amount of reversion will address the gap in the account.

Didn't LTCM make money based on a stable geo-political situation, and the collapse of the Ruble caused a sentiment shift, and their reversion trading blew their accounts?

If your belief is that the Swiss government will maintain the EUR peg, your average will do fine.
Once a long-held belief is broken, the wild swing in Price, causing a new average to be sought out may be large enough that the account blows any risk management you may have in place.

Unless, I guess, you take a reversion trade at one level, but are willing to bail out if it goes too far against you, rather than adding to a trade going against you, believing that reversion is around the corner.

If prices moved smoothly, you can adjust, but Black Swans are always flapping about in the background.

Still, it's worth exploring further.
(Although, I believe that following the Average, rather than reverting to it, is safer.)

 

[CavaliereVerde]

Exact, now you can look to EURUSD and say that the average or the fair value is 1.15.
Maybe in 2030 the average will be somewhere else.

 

[McQuant]

<sarcasm>
If you have pocket deep enough price always returns back to MA!
</sarcasm>

 

[BigDeal]

Since prices create the averages in the first place, it's a self fulfilling prophesy - eventually.

 

[kevinberry]

The strategy is really nice but if it is providing you with guaranteed edges, don’t you think everyone would get profited with it.

 

[IceThor]

Price always returns to it's average.

Always.

If this is true and we can figure out when it is most likely to happen, we have a strong edge on market behavior that has always and will continue to always play out

So what needs to be considered?

Well a lot of traders will tell you distance from the average is key. So if price is much further away from the average than normal, it will probably return to it fairly soon.

Of course this is nonsense. Complete and utter drivel.

On its own, distance from the average tells us nothing apart from the fact that we are in a strong trend or maybe experiencing a significant news event.

A better measure than distance travelled from the average is TIME spent away from the average compared to how long price normally spends away from the average.

Remember, if price always has to return to it's average, which it does, then the longer it has spent away from the average compared to normal, the higher the probability of it returning to the average sooner rather than later becomes.

This combined with distance from the average now starts to give us a very powerful indication of whether price is likely to return to the average sooner rather than later.

The last element which I won't go into to much detail as it starts getting a bit mathsy is the Rate of Change of the average. We can discuss this later on, but it is critical to understand

So, if you are trading mean reversion back to the average of price remember - distance from the average is a start, but TIME spent away from the average is a far more useful concept to master.

Once we know price has spent to much time away from it's average we can start initiating positions to profit from it's return to the average.

Remember, price always returns to its average. Any average. Always.

All the best

JustinView attachment 289307View attachment 289308View attachment 289309View attachment 289310View attachment 289312

so how do we trade this?

 

[NVP]

unless anyone had'nt noticed ...average reverts to price .....try it out with a strong move then total lack of volatility in the market ...what moves the most ?

average is ....well average
N

 

[Elsa50Pounder]

That is true. In most cases, the original price at which you invested does surrender back so there is very less chance of losing your principal amount if you play well.