Day Trading: Mean Reversion Strategies
Upskill Your Mean Reversion Reversal Trading
Risk Management: Event and Headline Risks
Managing risk is a cornerstone of any successful trading strategy. A thorough understanding of risk and how to manage it can make all the difference between success and failure.
It is Important to identify the event and headline risks associated with your trade. Event risk refers to the potential impact of an unexpected or scheduled event that can influence the market. Similarly, headline risk involves potential changes in market conditions due to the news or developments.
Check reputable financial calendars, such as the one provided by Pepperstone, to stay updated with upcoming important events and announcements.
Establishing Stop Loss Areas
Determining where to place your stop is crucial in trading. Your stop should be positioned where the trade’s rationale is no longer valid. Consider the following techniques for optimal stop placement:
- Placing your stop under or above a key level
- Using a percentage of Average True Range (ATR) to accommodate volatility
- Using X minute bar extreme, if you’re using it as a trigger
- Using a percentage of the trigger bar range
Remember, planning and discipline are paramount here.
Defining Price Targets
Defining a price target for your trade can be based on multiple strategies, including:
- Volatility-Based: Using a percentage of ATR or a pivot point
- Price-Based: This depends on whether you are trading for a bigger move or a scalp type trade. For mean reversion, you can use moving averages, VWAP, Open, High, Mid Range, and for bigger moves, consider the whole day or prior extreme.
- Duration-Based: This involves holding a position for a specific amount of time and then closing it, irrespective of the price.
- Risk/Reward-Based: Use a fixed risk vs reward structure for your trades. If you’re targeting a 2:1 risk/reward ratio and your stop is 125 ticks away, your target would be 250 ticks away.
- Trailing: Let the market decide when to exit the trade. Ideas include trailing a stop under/over the last candle low/high, using a moving average aligned with the trade idea, or using a stair step type trail using prior swing lows/highs.
Scalping vs. Holding
Determining whether to go for a quick scalp trade or hold for a more significant move depends on multiple factors. Look for clues such as the alignment of higher time frames for a larger move, whether a broader pattern is at play, or if there’s a potential catalyst that could cause a reprice scenario.
Whether you’re in for a quick scalp trade or a trade to hold onto for a broader move, checking your levels and market conditions is key. Remember, don’t make decisions on the fly; have a plan and stick to it.
Entry Improvement & Scaling
Being patient and waiting for price improvement can be a game-changer in trading. Consider the following options:
- Wait for a price improvement
- Enter half the trade now and add more if the price drops to your desired level
- Enter all the trade now
Scaling in involves adding to your position as the price moves in your favor, while scaling out involves gradually exiting your position as the price moves against you. Scaling in and out allows you to potentially maximize your profits and minimize your losses, but it requires a lot of discipline and a solid trading plan.
Wrap-Up
Successful trading isn’t just about making the right decisions, but it’s also about managing the potential risks effectively. Understanding event and headline risks, defining your stops and targets, and deciding on trade duration can all contribute to more success in trading.
This is part 2 of the Intraday Price Reversals Webinar. Click here to go back to Part 1.