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# How to filter out trending stocks in mean reversion strategy

Discussion in 'Strategy Building' started by danmb280, May 6, 2007.

1. ### danmb280

I'm currently working on a mean reversion strategy and wanted to get opinions on how to filter out stocks that are trending too strongly.

I was trying to use the ADX(14) as a filter and only take the trade if adx(14)<25 but that didnt work well. I also played around with the ADX lookback period from 14 to 30 but that didnt do much either.

Any help is greatly appreciated

2. ### nazzdack

You've got it backwards. Focus on holding the trending stocks and filter out the mean-reverters.

3. ### itmediaco

Detrending means removing the drift (subtracting the centered average):

PriceClose *minus* SMA(Period/2)

The output is a highly mean reverting series.

4. ### danmb280

Would you be able to give me an example?

Lets say the stock price is 83.50 and the SMA line I use for the bollinger band is a 200MA.

What's the output and how is it used?

Thanks

5. ### itmediaco

You would run your mean reversion system over the detrended series. Attached is an example chart, except here I divided price by the centered SMA, instead of subtracting.

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6. ### KS96

Define "trending too stronlgy" and I'll give you the formula.

7. ### danmb280

stocks that will not break through and continue through a Bollinger Band that's 2 dev from a 200ma on a intraday 1 or 5 min chart.

8. ### QuantPlus

Stocks do not revert to a "mean"...
This is statistically bogus TA type thinking.

But stocks MAY revert to a medium term historical ratio...
** Set by an efficient market **...
Versus another stock or index or universe.

9. ### danmb280

I do appreciate everybody's comments on this thread,but Im beginning to feel somewhat lost as I do not have a background in physics, mathematics or statistics.

10. ### onelot

You're being too literal. Hedge funds and traders commonly use the term "mean reversion" for strategy description, it isn't just TA.

Second, don't agree with your elaboration. Stocks can revert to more than just "historical ratios", especially in the extreme short term. Also, depenendency on other stocks or indices or "universes" aren't required. I say this based on trading multiple profitable mean reversion strategies, not based on overly-technical pseudo-quant definitions. Profitability is what the OP is after so spare him the pretention.

To OP: you don't need one [background in math]. QuantPlus is being a little too intelectual for the convo.

#10     May 8, 2007
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