Mean reversion trading

Handle123 · Mar 20, 2023

Odsen said:
Hi guys, I am looking into mean reversion trading, specifically for Forex markets. I am looking to identify the setups on 4 hour chart, this is due to my availability. Also using the 1 hour chart to zoom on the mean reversion move to help me with decision making.

I am relatively comfortable with the rules of how I should be managing the trade, so won't be asking questions about that. Instead, I would like some general advice on how to identify high probability mean reversion setups.

In the "strong move" attachment, in the last several candle we see what looks like a strong move. In the "mean reversion" attachment, in the last several candles we see what looks like a much slower move in the opposite direction and possibly a good opportunity to enter.

I will split my question in 3 parts:
1) What guidelines/rules/metrics should be used to identify the strong moves that precede the mean reversion move? In the "strong move" attachment, to me the strong move is fairly obvious, but to another person it might not be. So some solid rules would be good.
2) Does the mean reversion move have some sort of expiration for the purpose of entering the trade, both in terms of price covered and time (relative to the strong move)? For example in the "mean reversion move" attachment, you could enter on the last candle seen on the chart. But what if I decided to enter after another several candles of the same size were formed, while the move is continuing down? See attachment A. Would this necessarily mean that the probability of this particular trade giving me profit is now much different?
3) What price action and the duration of price action is acceptable between the strong move and the mean reversion move? In this particular example the mean reversion move started pretty much after the end of strong move, with no price action events in between. But in other cases, we could have something in between, such as a double top, or the market going flat for some time (attachments 3 and 4).

Any suggestions from people who successfully trade mean reversion will be greatly appreciated.
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I find currencies do well using chart patterns and SMA as trend using slope.

Reversion to mean more like index futures or stocks.

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Mean reversion trading

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