Extremely short cliff notes: The specific product being traded has gone "to far" in relation to how the price historically moves (fading a large sigma move) and "should" revert to some type of historical price mean. In short, fading.
Grain markets are called: Breakout and Run type markets because supply and demand fundamentals are seasonal. Yes the funds will price in weather PREMIUMS etc but the result is the same. Breakout and RUN markets to those that know how to play the game. Financial markets are Back & Fill markets. That explains it all for those markets. The rest is up to you. Reversion to the mean. Sounds more like trading with a "HOPE ROAP" than with a real plan. I can picture traders out there seeing something they assume as UNUSUAL or out of the ordinary and thinking..........Gee, i better go the other way because this is not normal. Not cool, not cool at all. (i liked the guy that asked if this was the way to making millions. )
Szeven and PatrickQ, thank you for sharing your knowledge. You guys know how to squeeze some dough out of the markets and your opinions are very welcome here.
bighog, Szeven says that he actually knows traders who make millions using reversion-to-mean (RTM). do you know daytraders who make >1M/year and who primarily don't use RTM? nobody says RTM is easy. for example, today should have been a good day for me because of the chop, but MGM Longs ate all my profits and then some more. to add insult to injury, the sucker is up 8% AH (while i exited MOC).
Ha , shortie says this must be legit because some guy actually KNOWS guys that make millions. ya gotta love ET. .. One of the fallacies about making a comment for or against some ideas, thoughts etc about a certain strategy that was posted is you get replies from the believers and you are not going to change their minds right or wrong. Thats what makes a market and we all know the truth will be found where the truth waits for you and that is in the market when you fork over some real cash. Just by the very nature of THINKING it will revert to the mean is going against the trend, it is in itself trading 1/2 a loaf because you are assuming the move will not continue. THATS hoping my friend.......keep it up and you are doomed to fail. <a href="http://www.sweetim.com/s.asp?im=gen&ref=11" target="_blank"><img src="http://content.sweetim.com/sim/cpie/emoticons/000202C4.gif" border=0 ></a>
bighog, don't get me wrong: your comments are very much welcome exactly because you do question the whole premise of RTM. but so far I am less convinced by your arguments. Szeven is not a nobody, he made 1.1M last year and this is good $$ as far as i am concerned. According to him, traders better than him primarily use RTM so this is a good vote in favor of RTM. for all i know you could be a big hitter yourself and ORB is all you need to make decent $$. and even though there are no big hitters that you know who use RTM (i surmised this, maybe erroneously), this does not invalidated RTM.
Just read this quote and thought it was fitting. "Your mind is your only judge of truth - and if others dissent from your verdict, reality is the court of final appeal" - Ayn Rand, Atlas Shrugged
I think there's more to it than hoping prices RTM. I think the mean prices may be considered areas of value as determined by the auction process. When prices move but then fail to establish a new area of value (volume at those prices dries up) - it makes sense for prices to revert back to the last established value area where trades happen and volume is more consistent.