The first step in building such a system is to define what mean reversion is. Mean reversion systems are looking for markets that are unusually high or low and will eventually return back to the mean. We want a system that looks at a particular market with a significant deviation from their average. Our previous research we did on opening range breakout systems already showed us that opening range breakouts define the trend for the rest of the day in about 30% of the time. Which means that out of 20 trading days we have 14 days of price patterns that are reverting back to the mean.
Time frames are used in order to forecast future price trends. Many traders are missing out on this important aspect of trading by only looking at one time frame when trying to define a trend. Therefore its important to categorize trends as primary, intermediate and short term trends. As a rule of thumb the primary trend is filtering out much of the market noise and is giving us more reliable signals in which direction the market is heading
Trading is a tough business and coming up with the right idea for your trading strategy is sometimes a tedious task. It looks like a mountain you cannot climb. But don’t panic we are here to help. So today we talk about the futures market and how to do proper statistical analysis when trying to find your way to the promised land. Analyzing time series can be compared to the work of a butcher. There are some nice parallels here. Like a butcher who is cutting and processing the raw meat before he sells it you need to process the numbers and do your analysis. Bit by bit you are fragmenting the time series trying to find your edge.
The goal of this research is to find various set-ups and exit strategies that could be used for trading the opening range breakouts. The fact that important economic news are often announced at 10:00 am makes it even more significant. Some analysts even claim that about 35% of the time the high or the low of the day occur within the first 30 minutes of trading and it defines the direction of the trend for the rest of the day. Our analysis will show if this argument holds true.
When it comes to trading there is a common belief that most behavior in markets can be explained by assuming that market participants make ‘logical’ trading decisions. In reality we know it’s not that easy. However there are market movements that are predictable because they repeat every year. These patterns are created by the collective actions of market traders themselves and can be used to predict the market.
The concept of diversification is based on the concept that a trader can reduce his risk exposure by entering several positions at the same time. The success of a traders portfolio is therefore based on reducing risk rather than maximizing returns.