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Pairs trading
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Pairs trading

  #31 (permalink)
Legendary Market Wizard
Houston, TX
 
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kareem40 View Post
and actually add ( yes add) to your losers

That's actually pretty typical in a mean reversion system. The further you are from the "mean" or "normal range" the greater the probability of a reversion, so the bigger the position you want to have on. The problem occurs in those rare times when it doesn't 'revert' as you have you biggest position on as it goes against you!

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  #32 (permalink)
Legendary Market Wizard
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SMCJB View Post
That's actually pretty typical in a mean reversion system. The further you are from the "mean" or "normal range" the greater the probability of a reversion, so the bigger the position you want to have on. The problem occurs in those rare times when it doesn't 'revert' as you have you biggest position on as it goes against you!

Hi
Thanks for the post. There is so much negative posts and so called "gurus" that tell you to never to add to a loser. For the most part they are right, I do my very best not to on an outright. But for spread trading and the only thing that have minimized the very big loses is that the fact the I insist on closing all, rain or sunshine, by 3 CST. Testing by hand, I have seen $300-500 daily loss ( based on micro size-max of 5). Not many, you just need to be ready mentally for them when they do happen.
K


Last edited by kareem40; July 8th, 2019 at 06:30 PM. Reason: Spelling
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  #33 (permalink)
Legendary Market Wizard
Houston, TX
 
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Adding to losers is normally a bad idea and I actually wrote a heavily read post Why you should add to winners and never add to losers a few years back. So why given that post do I think it's both common and okay to add to losers in a mean reversion strategy? Well that analysis assumed a constant probability of the market going up or down. If our hypothesis of a mean reverting price action is correct, this is not the case as the further we get from the mean, the greater the percentage chance that we revert. If I get bored tonite I might write a simulation to try and illustrate this.

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