Simple Mean Reversion

Simple Mean Reversion

by Dr.Hamdi Boukamcha
Hello, and thanks for stopping by!

Regardless in the event you’re new or previous member of the discussion board, maintain studying right here and I promise you’ll not be upset!
From my standpoint this thread is the pure continuation of the thread “Larger Edge inside a Single Candlestick” and right here I intend to share with you a few of my discoveries concerning this idea.

As I commented within the unique thread, I imagine that we are able to create and apply a number of methods solely by utilizing the data which is current inside a single candlestick.
Nevertheless I need to distance myself from the candlestick as a device just because we don’t want candlesticks. I feel they’re simply pointless distraction.
We’re going to give attention to the uncooked knowledge.
That is why I need to focus and to deliver to your consideration the idea of the pure buying and selling cycles. Primarily the every day cycle and to some prolong the weekly cycle.

Later within the thread I’ll try to clarify the relationships between time and worth which exist inside every buying and selling cycle. These relationships are the muse of the technique which you’ll study on this thread.

So, let’s get began!

First if we need to have clear understanding, we’ve got to outline the primary phrases.

Time! All occasions on this thread are primarily based on GMT+2. That is my time zone and likewise the unofficial time zone from which we decide the beginning and the tip of every day on Forex.

Nearly all of the respected brokers use GMT+2 on their servers. So 00:00 on GMT+2 is strictly in the midst of probably the most inactive interval. (After US shut and earlier than Asia open) That is the beginning of the every day candle.

What’s “buying and selling cycle“? It is quite simple. The buying and selling cycle constitutes a hard and fast time period throughout which we’ve got principally uninterrupted buying and selling exercise. Every cycle is separated from the opposite cycles by a time period with very low or no buying and selling exercise.
On Forex we’ve got solely 2 pure cycles. Each day and Weekly.
The every day cycle begins at 01:00 and ends at 23:00 every day.
The weekly cycle begins Monday at 01:00 and ends Friday at 23:00.
In our technique we’re taking a look at every cycle as impartial occasion!

Excessive and Low. Once I say excessive or low, I imply the very best or the bottom worth of the present cycle.
Vary. The vary is just (excessive – low) for the present cycle.
Mid – that is the center of the vary. Or, mid=high-(vary*0.5); Or (excessive+low)/2;
sqrt(t) – That is the sq. root of time. For now we do not want this. However we will use this calculation later within the second layer of the technique. (The place we add some extra difficult optimizations).

So let’s get right down to the fundamentals of the technique. I take advantage of the every day cycle, however you possibly can apply the identical guidelines to the weekly.
First we create the framework. For simplicity on this instance we assume that the cycle begins and ends at 00:00.

So we could say an oblong flat airplane.
The vertical dimension is a variable and it is decided by the value. (The vary)
The horizontal dimension is fastened and in our instance is the same as 24 hours.
With this airplane we constantly monitor the placement (the coordinates) of the present worth, the excessive, the low, and the center.
Right here you possibly can see one quite common instance of accomplished every day cycle.

Connected Picture (click on to enlarge)
Simple Mean Reversion

Discover that we additionally monitor the placement of the present time in relation to the mid cycle. Within the base mannequin we use 12:00. Later after we apply the second layer of the system we are able to shift this worth again or ahead to be able to optimize the technique.
The situation of the “center” of the cycle partly determines the aggressiveness of the technique. The additional away it’s from the beginning – the upper the danger. From this may emerge all types of implications by way of the likelihood distributions. (I’ll clarify the mechanics later)

Now let’s have a look at how we are able to make the most of all this info. Needless to say later we are able to modify a number of the parameters for higher optimization however the primary construction of the system all the time stays the identical!

Listed here are the essential buying and selling guidelines. I clarify just for SELL place. The BUY is similar however inverted.

We break up every place into a number of models. The positions are construct utilizing inverted pyramidal construction. We construct the place by “scaling in” UP TO the utmost measurement. (Not on high of the utmost). The utmost is dependent upon account measurement, threat urge for food and some different issues.

1. Preliminary sign. (If there isn’t a open place)
We SELL 1 unit when the present worth is the same as the very best worth for the present cycle AND the present time is beneath the mid cycle. (In our instance earlier than 12:00)

2. Secondary sign. (Place build-up).
If the present worth is above the earlier entry worth + X, then we add 2 models.
X is a variable which we decide with optimization. As a typical within the first layer we are able to use 10% ADR. Within the second layer we are able to add nonlinear calculation with sqrt(t). However for now we do not want this. You simply have to grasp the essential construction.
So with this technique we construct inverted pyramid.
Preliminary open 1
If the value is above 1+X then we add 2.
If the value is above 2+X then we add 3.
We are able to maintain including till we attain the utmost place measurement. 1+2+3+4+5……….

3. Place Shut.
If we’ve got open place and the present time is earlier than the mid cycle (12:00), then we search for correction to the mid vary. (50% retracement from the excessive)
If the present time is after 12.00, then we search for 25% retracement from the excessive.
Within the second layer we’re going to add extra exact and steady calculation utilizing nonlinear components. For now it isn’t needed.
Whatever the final result throughout the buying and selling cycle, ALL positions are closed on the finish of the cycle. I our instance at 00:00 or at 23:00.
Okay. That is the muse of the technique! Even with these easy guidelines, this technique will generate at the very least 85-90% worthwhile days. Or 9 out of 10. Common RR on commerce by commerce foundation is above 1:1,5 (or nearer to 2) and win% is over 60% for positive.

However after we add the second layer with all optimizations and extra exact calculation we are able to deliver the success price as much as 98%+ worthwhile days.

Right here you can even obtain the indicator which tracks the cycles. It’s totally useful gizmo for visible/guide backtesting. A minimum of I take advantage of it so much.

Connected File
Simple Mean Reversion   DRS.ex4   24 KB | 723 downloads

Who is aware of, in the event you dig deep sufficient, possibly you’ll uncover the opposite secret methods primarily based on a single candlestick. Simple Mean Reversion   As I stated there are at the very least 2 extra.

Connected Picture (click on to enlarge)
Simple Mean Reversion

You’ll be able to count on extra particulars within the subsequent posts. (When I’ve time).
And I promise you that after I end with this thread, everybody studying this may have the chance to earn money with this technique! Simple Mean Reversion

Huge Thank’s To  Simple Mean Reversion   alphaomega 

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