Registered: Apr 2002
07-10-12 02:46 PM
I think that you should validate your perspective a bit further before declaring mean reversion the best strategy.
Trading for mean reversion in commodities spreads the past several years has not been productive. And that is being very diplomatic about it. If you are fading one or two sigma moves you are asking for unsolicited prison sex.
This particular spread does seem at first blush, in a limited timeframe, very mean reverting. When looked at in a broader context, you can see that it trends particularly well and that once the spread breaks out of a trading range and establishes a new value area ( control area in Market Profile parlance ) it is usually there to stay.
The problem with fading is that the money your make fading one and two sigma moves over a period of time is given back when the trade breaks out once again. You will almost certainly have loaded up for size as that spread goes through what you think at that point in time are abnormal 1, 2, 3, and 4 sigma moves.
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