10 Mean Reversion Trading Strategies
Leveraging Market Oscillations
Mean Reversion Strategies
Previously, I looked at 10 Trend Trading Strategies and how traders can include them in their toolbox
This time, I want to break down 10 trading strategies capitalising on Mean Reversion.
Similar to the last webinar, I’ll outline their thesis, entries, stops, and target ideas.
I’ll also include annotate chart examples of winning and losing trade examples, so you can see these setups in real-world conditions.
Remember that market context is so important for any trading strategy.
Do your own research and enjoy doing it!
Ok – ten mean reversion plays. Let’s go.
Double Top Chart Pattern
Trade thesis: Selling a second failed test of a key level.
Entry: First red candle close
Stop idea: Distance from entry to the high multiplied x 2
Target idea: 2:1 RvR
Bollinger Band Reversal Strategy - (Theif)
Trade thesis: Wait for price to test the upper or lower bollinger band, form a two bar reversal and revert to mean. (range of bars must be > ATR(14), first bar must close outside of band, second inside)
Entry: Sell on candle close (short)
Stop idea: Outside of the bar
Target idea: Moving average (mean)
2 Period RSI - Larry Connors
Trade thesis: Align with the trend using the 200MA and buy dips when the 2 period RSI is oversold
(<10 or 5)
> Longs above 200 MA
> Shorts below 200 MA
Entry: Market closes oversold for longs, overbought for shorts. RSI (2). OS @ 10, OB @ 90
Stop idea: Under recent low
Target idea: Close above 5 SMA
Pair Trading Strategy
Trade thesis: Correlated markets will mean revert. Bracket a range and trade outside in.
Entry: On a test of the outer edge of the range
Stop idea: 50% of range width
Target idea: 2:1 RvR
VWAP Extensions Setup
Trade thesis: On an intraday chart, once the VWAP goes flat, extensions to the upside and downside can be faded.
Entry: Frame a typical extension and use as a zone of interest.
Stop idea: 100% of the price to VWAP range
Target idea: VWAP
Ignition Bar Retrace
Trade thesis: After an ignition bar in a counter trend direction we look to join a 50% pullback
Entry: 50% of the bars range
Stop idea: Under/Over the bar
Target idea: 2:1 RvR or an obvious mean
Flush Candle Trading Strategy
Trade thesis: After a persistent trend, look to fade a quick move in a short period of time (with volume)
Entry: First opposing bar (ie 1st red after green drive)
Stop idea: 50% of the flush bar range
Target idea: Scalps > Flush bar. Day trades > Mean
Low Break Fake - Mean Reversion Trade
Trade thesis: Buying a fake out under a key low, usually the prior day.
Entry: Long as price comes back up through the prior days low
Stop idea: Under prior days low
Target idea: Typically a 1 – 3 day move unless looking for a specific target on the daily chart.
Market Open Price Test
Trade thesis: After an opening drive, price will quite often retest the open, giving a trade opportunity.
Entry: On test of the opening price
Stop idea: 50% of the initial drive
Target idea: VWAP or opening 15 minute high
Outside Bar Reversal
Trade thesis: Waiting for an outside bar when price is in a rotational environment and away from the mean.
Entry: Close of the bar
Stop idea: 50% of the bar
Target idea: 2:1 RvR or 20 MA
Mean Reversion Setups - Your Trading Plan
These mean reversion trading strategies can be a valuable addition to your trading plan (check out my trading plan deep dive page for more on plans)
As mentioned before, market context is super important with any strategy you choose to deploy.
And of course, your mindset and trading psychology. In fact, if your trading discipline is a bit weaker than you’d like, work on that first before making any major moves into new strategy development.
I have some free resources here on my Trading Psychology page that will help you.
If you want a copy of the webinar slides in PDF format, sign up for my daily email and reply “Slides” to any of the emails and I’ll make sure you get a slide pack.
Interested in trend trading too?
Of course you are!
Here’s my 10 Trend trading strategies webinar for all your trend strategy requirements…