Reversion To the Mean (RTM) Intraday Strategies

Discussion in 'Strategy Building' started by Trend Fader, Dec 21, 2008.

  1. Tums

    Tums

    a pix with arrows and annotation always helps to illustrate a point.

    Why does a method (any method) works some times, but not all the time?

    What is your thoughts?
     
    #51     Jan 13, 2009
  2. Either:

    1. The method shown is incomplete (or the method is complete but the entire thing was not presented)

    2. But most people will say "one must understand price action and indicators are just a guide"

    :D

    Oh, or it could be that the person showing the method is cherry picking instances where it worked (not saying that's what you did at all, but that happens ALL THE TIME in the trading world, especially when people are selling $5000 indicators).
     
    #52     Jan 13, 2009
  3. Tums

    Tums

    nothing is ever complete... we will be 6 feet under when things are complete.

    Let the purist be purist... we are all entitled to our own oblivious bliss.

    The keyword I was looking for is Context.

    When a method works sometimes... but does not work in another time, that's because the market has changed its context.

    Let's make an overly simplified example.

    Strategy A: Buy and Hold.
    Instruction: Buy a stock and hold it for X months/years.

    Many people have made lots of money with this method.

    But we all know it works some of the time... but not all the time.

    Why did it not work last year?

    --> the context has changed.

    This method only works in a Bull Market.

    <hr>
    Let's make another overly simplified example.

    Strategy B: Enter on Breakout
    Instruction: Buy if price breaks previous bar's High. Sell if price breaks previous bar's Low

    We have all tried this strategy.

    We all know that it works... some of the time. LOL

    Well... what is the context we are looking for?

    ---> Trendy Market

    This strategy will fall flat on its face in a choppy market.

    <hr>

    RTM is no different...

    It works in certain context.

    We need to be sensitive to that context.



    ... more later.
     
    #53     Jan 13, 2009
  4. How'd you get that horizontal rule? Do hr tags work on this forum?

    <hr>

    Awesome!!

    Tums, I understand. So we need to define the context in which this (or any method) works.
     
    #54     Jan 13, 2009
  5. Tums

    Tums

    Let's go back to that chart I posted.

    first, cover up the indicator on bottom... and look at the chart.

    What do you see?

    What is the market telling us?


    <img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=2232658>


    The market beams out its signal to us every tick.
    If we can interpret its signal, we will understand its intention. (i.e. next move)
     
    #55     Jan 13, 2009
  6. Looks like LL, LH, HL.

    Is it safe to assume that after the HL a reversion to mean may be probable? The presence of the LH and HL signal the downtrend may be ending.

    (that's what i'd guess based on my beginner knowledge of PA)
     
    #56     Jan 13, 2009

  7. a.k.a. "trading counter-trend". It works great until you hit a big trend day, then this method gets killed :p
     
    #57     Jan 13, 2009
  8. Tums

    Tums

    That's because the market context has changed, but you were ignorant of its happening
    ... and you continue to use a fading method for a trending market.

    Don't worry, don't get upset, you are not alone. It happened to a lot of people.
    After you got burnt a few times, there are 2 things you can do:

    1. step back to learn why that happened to you

    2. you became so bitter about the experience that you make it a life long crusade to tell everybody not to do it.
     
    #58     Jan 13, 2009

  9. WTF are you even talking about?????????????

    Did I say that I trade that way or not????

    1) do you disagree that most mean reversion trading is counter-trend?

    2) do you disagree that on the occasions that many people lose trying to trade back to the mean is typically when they have failed to recognize that the trend was continuing?

    Why would you make statements that I am ignorant or bitter of anything that we have not even discussed? Did I say that I specifically have been burned?????

    As a Moderator, you really should think through what you have just read before you type. And not put words in people's mouths as you do so.
     
    #59     Jan 13, 2009
  10. Tums

    Tums

    The same to you.
     
    #60     Jan 13, 2009