I'd show you a chart of the long vol position I've been in since July but it is too painful. Mean reversion always works! Until it doesn't .
Remembering 50% of the views here are from overseas, O'Hare is the main Chicago airport.
O'Hare spread Definition: An insanely large position in a futures market, plus a cab ride to the airport. At the end of the day, either you've made a lot of money and you hop a plane to Hawaii, or you've lost much more than you have and you hop a plane to someplace out of reach of U.S. justice.
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Interesting thread @Fat Tails . Too bad there are not enough posts. I have a few questions on Mean Reversion that I'll leave open to any good samaritan to share some insights and hopefully save me from backtesting a kazillion options.
1) What bands have given you best results? Keltner / Bollinger / MA Envelopes / others?
2) What type of Moving Average would you suggest to use? SMA / EMA / DEMA / HMA / Ehlers Filters? Do you use Typical / Weighted / Close as inputs?
3) Would you prefer to use VWAP instead of channels?
4) Do you update your targets or keep them fixed, for instance "LiveUntilCanceled" limit orders at execution?
5) Do you update your stops or keep them fixed, for instance "LiveUntilCanceled" limit orders at execution?
6) Finally, based on your experience, do you believe in Mean Reversion anymore? do you currently use it?
Last edited by ElChacal; April 15th, 2015 at 09:52 PM.
@ElChacal: Answering these questions would take hours, I can only put forward a few ideas.
1) This depends on the bar type used. On minute bars I like to use volume based indicators. I prefer volume-weighted standard deviation bands, which can be applied to a VWAP, a rolling VWAP or any volume-weighted moving average. On volume bars, volume is evenly spread and you can use standard indicators.
2) VWAP is universal, otherwise volume-weighted averages.
3) I use VWAP with channels.
4) Both. I have fixed targets and also use trailing stops, which are sort of updated targets.
5) I use an initial stop and trail the stop.
6) Whether mean reversion works or not depends on the market. When markets are trending mean reversion does not work. When they are range bound it works. The difficulty is to find out what the market is currently doing.
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Thanks @Fat Tails . I probably started flirting with the VWAP but then got side-tracked with some other thing. There are just too many possibilities and ideas for a beginning trader. I am really digging into some old strategies before discarding them or putting them on-hold.
What you mention on reading the "market environment" reminded me of what Grimes said in his webinar how Mean Reversion or counter-trend performs better on commodities than indices, to use an intuitive example.
@Fat Tails , one question. I noticed you use SMA(3) as the smoother for your Bollinger Universal indicator. In case I wished to use "smoothed" VW std. deviations, would you suggest to use (3) as the period or the same period as the Middle band? Assuming I am using a VWMA.
I know this is a VERY OPEN, kinda silly question but you have a lot of experience with these indicators and can probably share some of your preferences.
Once again, thanks for all your indicators.
Counter-trend trading is not necessarily the same as mean reversion trading, at least not for me. Much of my trading is done by buying pullbacks in a longer-term up-trends or selling rallies in longer-term down-trends, so I'm counter a short-term move that is contrary to the longer-term trend. Exits are at an established mean. This works quite well in trending and sideways markets, but when the longer-term trend changes or the pull-back is deep, it can be painful. Over time though this has worked very well for me.
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