The - Mean-reversion - Strategy Explained - Marketfy
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View The - Mean-reversion - Strategy Explained - Marketfy as PDF for free.
More details
- Words: 1,442
- Pages: 3
Loading documents preview...
5/8/2016
The "Mean-Reversion" Strategy Explained | Marketfy
Search
HOME
ABOUT
BROWSE
LOGIN
SIGN UP
Dr. Stoxx BLOG
PRODUCTS
ABOUT
Marketfy > Dr. Stoxx > The "Mean-Reversion" Strategy Explained
The "Mean-Reversion" Strategy Explained By Dr. Thomas Carr — Author The following article is sponsored by the Dr. Stoxx Options Letter
Get Free Email Updates Email Address
JOIN NOW
Join 471 awesom e people who get the latest free content from Dr. Stoxx Options Letter in their inbox.
In my two previous articles on this topic, I detailed how traders and investors use one of the most common components of technical analysis, the simple moving average. A moving average is a
CHECK OUT WHAT MY VIP MEMBERS GET
running average of the closing price of a stock over x number of time periods. The two most widely used averages are the 50day and 200day moving averages. Moving averages are not just used by specially trained market technicians. Even financial analysts with Harvard MBA’s will refer to the 50day and the 200day moving averages as frequently as they do to P/E ratios and earnings growth rates. In the previous articles, I talked about how moving averages help us get a good “read” of a stock’s price chart. We’ve seen how to use moving averages to determine the dominant trend of a stock or index, as well as the ideal points at which to enter or exit that trend. Today I want to bring my
Most Recent
Most Popular
How to Make $100 to $500 per Day Trading S... Posted on Jan. 12 , 2 016
discussion of moving averages to a close by talking about one more way to use moving averages.
Breakout Chart of The Day #2: huge dividen...
This is, in fact, the most profitable technical trading strategy I use. In this strategy we are stressing
Posted on Dec. 2 2 , 2 015
the idea that certain moving averages – particularly the “big two”, the 50day and 200day averages – act as “magnets” for the price of a stock or index whenever it moves too far away from the
Breakout Chart of The Day: dog food?
averages.
Posted on Dec. 2 2 , 2 015
The phenomenon I am referencing here has a fancy label. It’s called “mean reversion”, and it
How to Trade Fast Moving Stocks - part 1
recurs so often in financial markets that studying it and learning how to profit from it have become
Posted on Dec. 16, 2 015
a kind of cottage industry. Some of the world’s greatest financial minds, including Ivy League professors and Federal Reserve Bank economists, have published peer-reviewed papers on the subject.
How to Take Advantage of the "Thanksgiving... Posted on Nov. 2 5, 2 015
The idea behind mean reversion, in a nutshell, is this: a moving average of share price represents the accumulation of wisdom on the fair market value of a particular company’s shares (and hence, of the company itself), while the day to day fluctuation in share price is more a reflection of the ever changing whims of market sentiment. Thus whenever that sentiment drives share price too far
Reviews
Average Rating
from its average, the efficiencies of market forces being what they are, share price is bound to revert back to its mean in short order.
By pflowbob — 1 year ago
Determining just when price has been stretched too far from its average, and just how far back to the mean it will travel when it does revert, is more art than science. But there is one tool that can help us greatly with this determination. Using past price performance over X number of time
I am new, but so far, it's an exciting newsletter. There are many trades and easy to understand.
intervals, this tool measures standard deviation from a moving average and draws bands on the chart, both above the below the average, that show the upper and lower limits of that deviation. It is expected that price will stay contained within these bands going forward. This would be “normal”
By thebigsy — 1 year ago
price action. Any move above or below the bands, therefore, signals an “abnormal” move beyond the standard deviation, hence an overextension that is likely to revert to the mean. The tool I’m talking about here, of course, is Bollinger Bands, developed by market technician,
Great product, attention to detail, great strategies. Just follow the instructions and you can't go wrong.
John Bollinger, back in the 1980’s. I’ve used these bands for years and can say that, like most technical indicators, they work well when they work! But when the Bollinger Bands are not working well, your trading based on them can go horribly wrong. Still, when we couple the Bands with stop-
See All Reviews →
losses to minimize the damage, they are the best tool we have for determining regions of price extremes where a stock or index is likely to get over-extended and flip back to the mean. Let me show you some examples. In the chart below you’ll see shares of EBAY, Inc. (Nasdaq: EBAY) with the 200day moving average overlaid, along with the upper and lower Bollinger Bands set at 1.5 standard deviations away from the average. You can see how over the past 9 months, whenever price travelled outside either band, it was only a matter of time before it bounced back the other direction.
https://www.marketfy.com/content/74202-how-to-trade-mean-reversion-setups
1/3
5/8/2016
The "Mean-Reversion" Strategy Explained | Marketfy
I used a standard deviation of only 1.5 on the 200day moving average in the above chart because it takes a significant move to get even that far away from such a long-term moving average of price. When we shorten our time frame down to the 50day average, however, we’ll need to increase our deviation from 1.5 to 2.0 to reduce the noise of false signals. Here is a chart of Amazon, Inc. (Nasdaq: AMZN) during a rather inefficient, tumultuous time in the stock’s recent history. I have here overlaid the 50day moving average with bands set at 2.0 standard deviations away from the average. You can see a greater number of signals compared to the chart above, and also that some signals would have been more profitable than others.
As you work with Bollinger Bands, you will want to refine your trading system. You cannot simply buy every dip below the lower Band and sell short every rally above the upper Band. As you experiment, I suggest integrating some of the following suggestions into your trading system: Only take buy signals at areas of price support and sell signals at areas of price resistance Don’t trade minor moves beyond the Bands but only those that exceed the Bands by a certain percentage (you can use the %B Bollinger Band Indicator for this determination) Try entering only when price closes outside the Bands on one day, then closes inside the Bands on the next day Only take trades when Bands are wide and avoid trades when Bands are constricted Mean reversion theory is a well attested phenomenon that, when learned well and traded appropriately, can be a very profitable approach to the markets. If you are looking for more resources on this trading system, you might want to try the Mean-Reversion Trading Manual I offer on my website, DrStox.com. You can also look at my book, Market Neutral Trading, where I fully explain how I use this trading system. But certainly the original source is always a good place to start too: Bollinger on Bollinger Bands, the “bible” of the Bands! Tickers:
AMZN
EBAY
Posted to Dr. Stoxx Options Letter on Mar 03, 2015 — 4:03 PM
https://www.marketfy.com/content/74202-how-to-trade-mean-reversion-setups
2/3
5/8/2016
The "Mean-Reversion" Strategy Explained | Marketfy
CHECK OUT WHAT MY VIP MEMBERS GET
Recent free content from Dr. Thomas Carr How to Make $100 to $500 per Day Trading Stocks — 1/12/16 Breakout Chart of The Day #2: huge dividend too! — 12/22/15 Breakout Chart of The Day: dog food? — 12/22/15 How to Trade Fast Moving Stocks - part 1 — 12/16/15 How to Take Advantage of the "Thanksgiving Effect" — 11/25/15
You need to login in order to post comments!
You can also use Ctrl+Enter to post
Comments (0)
POST COMMENT Sort By:
Oldest First
No comments. Break the ice and be the first!
Popular Pages:
Get Help:
Connect With Us:
1 Campus Martius, Suite #200 Detroit, MI 48226
Browse Products
Terms of Service
Facebook
Become a Maven
Privacy Policy
Twitter
+1 877 440 9464
Become an Affiliate
SEC Disclosure
LinkedIn
About Us
Contact Us
Blog
Send Us Feedback
Built by © 2013-2015 Marketfy
https://www.marketfy.com/content/74202-how-to-trade-mean-reversion-setups
3/3
The "Mean-Reversion" Strategy Explained | Marketfy
Search
HOME
ABOUT
BROWSE
LOGIN
SIGN UP
Dr. Stoxx BLOG
PRODUCTS
ABOUT
Marketfy > Dr. Stoxx > The "Mean-Reversion" Strategy Explained
The "Mean-Reversion" Strategy Explained By Dr. Thomas Carr — Author The following article is sponsored by the Dr. Stoxx Options Letter
Get Free Email Updates Email Address
JOIN NOW
Join 471 awesom e people who get the latest free content from Dr. Stoxx Options Letter in their inbox.
In my two previous articles on this topic, I detailed how traders and investors use one of the most common components of technical analysis, the simple moving average. A moving average is a
CHECK OUT WHAT MY VIP MEMBERS GET
running average of the closing price of a stock over x number of time periods. The two most widely used averages are the 50day and 200day moving averages. Moving averages are not just used by specially trained market technicians. Even financial analysts with Harvard MBA’s will refer to the 50day and the 200day moving averages as frequently as they do to P/E ratios and earnings growth rates. In the previous articles, I talked about how moving averages help us get a good “read” of a stock’s price chart. We’ve seen how to use moving averages to determine the dominant trend of a stock or index, as well as the ideal points at which to enter or exit that trend. Today I want to bring my
Most Recent
Most Popular
How to Make $100 to $500 per Day Trading S... Posted on Jan. 12 , 2 016
discussion of moving averages to a close by talking about one more way to use moving averages.
Breakout Chart of The Day #2: huge dividen...
This is, in fact, the most profitable technical trading strategy I use. In this strategy we are stressing
Posted on Dec. 2 2 , 2 015
the idea that certain moving averages – particularly the “big two”, the 50day and 200day averages – act as “magnets” for the price of a stock or index whenever it moves too far away from the
Breakout Chart of The Day: dog food?
averages.
Posted on Dec. 2 2 , 2 015
The phenomenon I am referencing here has a fancy label. It’s called “mean reversion”, and it
How to Trade Fast Moving Stocks - part 1
recurs so often in financial markets that studying it and learning how to profit from it have become
Posted on Dec. 16, 2 015
a kind of cottage industry. Some of the world’s greatest financial minds, including Ivy League professors and Federal Reserve Bank economists, have published peer-reviewed papers on the subject.
How to Take Advantage of the "Thanksgiving... Posted on Nov. 2 5, 2 015
The idea behind mean reversion, in a nutshell, is this: a moving average of share price represents the accumulation of wisdom on the fair market value of a particular company’s shares (and hence, of the company itself), while the day to day fluctuation in share price is more a reflection of the ever changing whims of market sentiment. Thus whenever that sentiment drives share price too far
Reviews
Average Rating
from its average, the efficiencies of market forces being what they are, share price is bound to revert back to its mean in short order.
By pflowbob — 1 year ago
Determining just when price has been stretched too far from its average, and just how far back to the mean it will travel when it does revert, is more art than science. But there is one tool that can help us greatly with this determination. Using past price performance over X number of time
I am new, but so far, it's an exciting newsletter. There are many trades and easy to understand.
intervals, this tool measures standard deviation from a moving average and draws bands on the chart, both above the below the average, that show the upper and lower limits of that deviation. It is expected that price will stay contained within these bands going forward. This would be “normal”
By thebigsy — 1 year ago
price action. Any move above or below the bands, therefore, signals an “abnormal” move beyond the standard deviation, hence an overextension that is likely to revert to the mean. The tool I’m talking about here, of course, is Bollinger Bands, developed by market technician,
Great product, attention to detail, great strategies. Just follow the instructions and you can't go wrong.
John Bollinger, back in the 1980’s. I’ve used these bands for years and can say that, like most technical indicators, they work well when they work! But when the Bollinger Bands are not working well, your trading based on them can go horribly wrong. Still, when we couple the Bands with stop-
See All Reviews →
losses to minimize the damage, they are the best tool we have for determining regions of price extremes where a stock or index is likely to get over-extended and flip back to the mean. Let me show you some examples. In the chart below you’ll see shares of EBAY, Inc. (Nasdaq: EBAY) with the 200day moving average overlaid, along with the upper and lower Bollinger Bands set at 1.5 standard deviations away from the average. You can see how over the past 9 months, whenever price travelled outside either band, it was only a matter of time before it bounced back the other direction.
https://www.marketfy.com/content/74202-how-to-trade-mean-reversion-setups
1/3
5/8/2016
The "Mean-Reversion" Strategy Explained | Marketfy
I used a standard deviation of only 1.5 on the 200day moving average in the above chart because it takes a significant move to get even that far away from such a long-term moving average of price. When we shorten our time frame down to the 50day average, however, we’ll need to increase our deviation from 1.5 to 2.0 to reduce the noise of false signals. Here is a chart of Amazon, Inc. (Nasdaq: AMZN) during a rather inefficient, tumultuous time in the stock’s recent history. I have here overlaid the 50day moving average with bands set at 2.0 standard deviations away from the average. You can see a greater number of signals compared to the chart above, and also that some signals would have been more profitable than others.
As you work with Bollinger Bands, you will want to refine your trading system. You cannot simply buy every dip below the lower Band and sell short every rally above the upper Band. As you experiment, I suggest integrating some of the following suggestions into your trading system: Only take buy signals at areas of price support and sell signals at areas of price resistance Don’t trade minor moves beyond the Bands but only those that exceed the Bands by a certain percentage (you can use the %B Bollinger Band Indicator for this determination) Try entering only when price closes outside the Bands on one day, then closes inside the Bands on the next day Only take trades when Bands are wide and avoid trades when Bands are constricted Mean reversion theory is a well attested phenomenon that, when learned well and traded appropriately, can be a very profitable approach to the markets. If you are looking for more resources on this trading system, you might want to try the Mean-Reversion Trading Manual I offer on my website, DrStox.com. You can also look at my book, Market Neutral Trading, where I fully explain how I use this trading system. But certainly the original source is always a good place to start too: Bollinger on Bollinger Bands, the “bible” of the Bands! Tickers:
AMZN
EBAY
Posted to Dr. Stoxx Options Letter on Mar 03, 2015 — 4:03 PM
https://www.marketfy.com/content/74202-how-to-trade-mean-reversion-setups
2/3
5/8/2016
The "Mean-Reversion" Strategy Explained | Marketfy
CHECK OUT WHAT MY VIP MEMBERS GET
Recent free content from Dr. Thomas Carr How to Make $100 to $500 per Day Trading Stocks — 1/12/16 Breakout Chart of The Day #2: huge dividend too! — 12/22/15 Breakout Chart of The Day: dog food? — 12/22/15 How to Trade Fast Moving Stocks - part 1 — 12/16/15 How to Take Advantage of the "Thanksgiving Effect" — 11/25/15
You need to login in order to post comments!
You can also use Ctrl+Enter to post
Comments (0)
POST COMMENT Sort By:
Oldest First
No comments. Break the ice and be the first!
Popular Pages:
Get Help:
Connect With Us:
1 Campus Martius, Suite #200 Detroit, MI 48226
Browse Products
Terms of Service
Become a Maven
Privacy Policy
+1 877 440 9464
Become an Affiliate
SEC Disclosure
About Us
Contact Us
Blog
Send Us Feedback
Built by © 2013-2015 Marketfy
https://www.marketfy.com/content/74202-how-to-trade-mean-reversion-setups
3/3
Related Documents
The Vampire Tarot Explained
January 2021 4
The Jibril Hadith Explained
January 2021 2
The Peak Valley Strategy
February 2021 2
The Essence Of Strategy
January 2021 2
The Super Scalper Strategy
February 2021 3
More Documents from "Himanshu"
Brahmacharya Gaurav By Swami Jagdishswaranand Saraswati.pdf
January 2021 1
Market_agrochemicals_religare_10.01.17
January 2021 1
Labour Law 2 Proj
February 2021 1
Leetcode
March 2021 0
