Wednesday, March 24, 2010

The Challenge of Mean Reversion Reversals in the Stock Market


Note how often price in the ES futures has popped to a new high or low, only to return to the prior trading range (blue arrows above).

I explained a major reason why this "mean reversion" occurs in my recent post on algorithmic trading.

This has proven to be a major challenge for short-term traders, who find themselves faked out on seeming moves that reverse.

The first step toward adapting is recognizing that a jump to a new high or low may be a trap. We then need criteria that help us differentiate the traps from the genuine directional moves.

More on that topic of criteria soon to come.
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2 comments:

Jyoti said...

Dr Brett,

Thanks for all your post, i just wait for them! this post is so true about the trap. If we see Market Delta today we can clearly see buying taking place in the ES(mainly 200+ contract sizes) as soon as we touched that overnight low.

On a separate topic is it possible to write on the blog regarding your trading screen setups.(how many monitors/charts/quotes/marketdelta screes etc...) Sorry if that post is already exists.

Thanks again for helping thousands of traders around the world with your valuable blog posts.

Soberba Insônia said...

I trade mini-contracts here in Brazil too. I´ve noticed that days like this, charts leaves some strange patterns i.e. strong candles with nice volumes that don´t evolve further.

So, when I recognize strange behaviours, I know what´s going to be about.

What do I do?

I reduce drastically my targets, and dont wait for retractions at all.

I know know.. I get just some crumbles.

But it´s a way I´ve found to participate and training fast executions in volatile days like these, which normally I dont even like to trade.