Under what market conditions does mean-reversion work better than trend-following?

Here is an excellent article written by Laurent Bernut, the CEO of Alpha Security Capital

The article describes the pitfalls of both trend following and mean reversion trading strategies along with ample insight into developing a trading system using the so-called Common Sense Ratio.

Finance is one industry where there is no shortage of creativity. There is always a new strategy, investment vehicle, or asset class. This alphabet soup is confusing, particularly when it comes to assessing risk and reward across asset classes. Yet, there is a simple universal way to classify strategies. They fall into two buckets: either mean reversion or trend following. Simply said, the exit policy determines the win rate, which then shapes the return distribution.

Trend following strategies rely on the capital appreciation of a few big winners. Whether they follow stories, fundamentals, earnings or price momentum, stock pickers are trend followers. They may fail to appreciate being called trend followers, but their P&L distribution tells a different story.


  • Regardless of the asset class, there are only two types of strategies: mean reversion or trend following
  • Each strategy type has a specific risk profile, which require different risk metrics. Common Sense Ratio recaptures risk for all strategy types (Read this, it is important)
  • How to increase the win rate, gain expectancy and overall profitability depending on strategy type ?

I. The only two types of strategies: mean reversion or trend following

Over the years of patiently testing multiple algorithmic strategies, patterns in the return distribution repeated over and over. It eventually became apparent that strategies fall into two buckets: mean reversion or trend following. Attached are graphical representations of the gain expectancy of mean reversion and trend following strategies. The reason why the same patterns repeat themselves is simple: exit policy.

Read the rest of the article at https://goo.gl/p8nmcH

Probability Statistics For Pivot Points

The floor pivot points have always managed to fascinate me with their predictive capabilities. I do not explicitly use them to take any kind of trading decisions; however, I keep them handy to get some idea of the current price action.  Curiously, I have noted that the price action respects the pivot levels on most of the days.

A couple of days ago, I came across this article. http://www.trade2win.com/articles/2124-using-pivot-points-forex-trading

In this article, the author Jamie Saettele has managed to highlight certain interesting pointers about the floor pivot points.

He shows the number of times as well as the % of the time, each of the floor point pivot levels have managed to make the price reverse. Please be aware of the fact that he takes into account of the EUR/USD pair only; and that too for a predefined number of trading days.

Traders who are interested in learning more about the floor pivot points should definitely look into this article.

Day Trading With The Trend Or The Importance Of The Opening Price

Traders have their own opinions about trading with or against the trend. Most of them will try to catch the tops or bottoms.

The rest will try to flow with the trend.

Although many traders are more than happy to dole out this advice i.e. trade with the trend, most of them (including me) have their own versions or definitions of the so-called trend. After all, what exactly is a trend and how do you determine it at any given point of time?

I have read in a few forums where traders chime in regularly that it is easy to determine the current trend of the market. According to these self-proclaimed experts, if the price or the candlestick chart is moving downwards from the left to the right, then the trend is down.

Likewise, if the candlestick chart showing the price is moving upwards from the left to the right, then the trend is upwards.

Do bear in mind that this is just a mundane explanation which may or may not help you in the long term.

If someone asks me about the trend, I just look at the current price of the instrument and compare it with the daily opening price of the same instrument. If the current price is above the open price, then the instrument has an upward trend.

If the current price is below the daily opening price, then the instrument has a downward trend.

Bear in mind that I took the daily opening price as the reference point because I am primarily a day trader. You can take the weekly, monthly or even the yearly opening price as the reference point in order to come to your respective outlooks about the instrument.

Upon closer inspection of the stock market prices, you can jump to a sane conclusion. Every day, there is an open price. As time progresses, the price will begin to float away from the opening price.

In other words, the price will either moves upward or downward throughout the day.

On trend-less / choppy days, the price will keep on making newer highs and lows throughout the trading period.

The beauty about taking into account of the opening price as the reference point is simple. This is the only price that remains the same throughout the trading period. However, the high / low / close price can keep on varying throughout the day.

Trying to take trading decisions based on these variables (high /low /close) will put your trading career in jeopardy. Focus on the factor that is constant every day. That is the opening price.

Once the market starts, they cant change the opening price. But the high / low and the closing prices will keep on changing.

Just take some time to think through all these. I am just trying to condense the intricacies of the stock market into simple and understandable terms.

Take any chart depicting any time period. Take a look at each one of the candlesticks. In every candlestick, the close price will be either above or below the opening price.

Yeah, on some days, the close price might be nearby to the open price. We call such days as choppy or trend-less.

My question to fellow traders is this – cant you use this point (the open price stays the same throughout the respective trading period) to make profits in the stock market?

Every day, the market shows the traders where to go long or to go short.

Go long above the open. Go short below the open. It cannot get simpler than this.

Once you begin to do this, trading becomes easy and less of a stressful activity.

Just think about it and let me know in the comments.

What Everyone Should Know About Trading Financial Markets (Video)

I came across this video while going through a post in Reddit Forex.

Both beginners and experienced traders can learn a lot from this video.

Day Trading Against The Trend

Traders will always have their own rhymes and reasons to place the trades. In fact, they need to have a solid day trading strategy. Without a proper plan to enter and exit the markets, traders are simply risking their hard-earned money without giving thoughtful consideration into the process.

What I am about to post over here comes from my limited experience day trading the Nifty Futures and the EUR/USD. I am always learning and will continue to do so for the rest of my trading life!

Anyway, let us get into the core subject of this discussion. Should you place trade orders against the trend? Will it provide the traders with an edge over the rest of the crowd?

Buy the low and sell the high

Trading against the trend will allow the traders to experience a sheer thrill. And when the trade goes just as they had anticipated, they will feel elated. Good profits exists every time the market decides to reverse after making a high or low. If you manage to get into that trade correctly, it is possible to make a killing!

Too many successful traders think that trading against the trend is the aspect which allows them to stay apart from the rest of the group. Even the inventor of the candlestick chart, Homma Munehisa thought that catching the tops and bottoms will allow the traders to accumulate profits easily. Applying his techniques, it was possible for him to become one of the most wealthy person in ancient Japan.

Another prominent trader Paul Tudor Jones also emphasizes on the importance of trading against the crowd. Here is his testimonial – “I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.”

I would like to mention that W D Gann also focused on price reversals. Yes, he always asked others to trade with the trend; but he never practiced what he preached.

Murrey Math is a simplified version of Gann’s calculations. Murrey offers the traders an easy way to set the current price action in a rectangle, so that they can know when to sell / buy against the trend.

Trading against / with the trend – this is a decision best left for you, the readers. Always trade with proper stop losses and try to exit when you have made enough for the day.

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