I'm not a technical trader but am looking to incorporate some basic technical studies into a fundamentals-based strategy. I'm certain it's a problem that has already been solved, likely in my charting/backtesting programs, so I'm turning to the forum gurus for suggestions on which indicator(s) to research further. I'm trading a short term reversion to the mean strategy for a piece of fundamentals-oriented data. I'm looking for cases where the fundamental ratio is significantly away from historical averages *and* the symbol has demonstrated that it tends to quickly revert to the mean. As an example, the attached pic is what an unfavorable or favorable pattern would look like. So, are there any simple, standard technical studies out there that will quantify the difference between these two cases? I'm thinking of something that will equate to the likelihood that an indicator that's 10% away from mean (or 2 standard deviations) will revert to the mean in the near term future. If no standard issue indicators come to mind, any ideas on how you'd think through a custom indicator? I'm capable of coding basic stuff but want to keep it as simple as possible. Thanks in advance
I would use an RSI of the series and I would look for divergences and double tops to indicate quick reversals.
The overswing of indicators depending on their nature(how they are constructed and for what purpose)and on the formation of trend structure on a particular time scale may or may not indicate extreme conditions. Price movement is multidimensional on each time scale with its own momentum, liquidity and time of day characteristics and it's not likely that one single indicator will capture the essence of the price movement. An extreme high reading on CCI, for example, is more likely to indicate unusual strength after a consolidation then exhaustion while a high reading in a downtrend backed by established trends on higher time scales indicates high probability mean reversion. MACD is a widely used indicator to foretell exhaustion but it's divergence from price and not the overswing that signals impending reversal. MA's, volatility bands, MACD, volume and an oscillator make a pretty good set of generic tools to find conditions where price would swing back to mean. Cheers bc
For series that are themselves mean reverting like TICK, ADVDECL, Keltner channels and BB's work wonders. bc
Maybe you could define "symbols that have the greatest tendency to revert" to mean "symbols that make the greatest profits with reversion trading-systems" To use this definition, you simply collect three or four reversion systems, run the historical price data series of your (300?) symbols through them, and sort by profitability. The symbols that appear at the top of the list, have the greatest tendency to revert profitably. Whichever of the three or four trading systems that is most profitable across all (300?) symbols, might be a good candidate to apply as a "tendency to revert" indicator.
There may be some useful stuff for you in this thread ... http://www.elitetrader.com/vb/showthread.php?s=&threadid=184307&highlight=Trend+Chop