Thought I would ask the question to all, could be an interesting debate.
I would like to understand is a market mean reverting or more trending.
I am thinking how do I test this?
Now simple as that idea seems obviously with all the details seems theres a lot more to it.
(like what timeframe, what is a trend, etc)
I would love to hear from everyones point of view how they define it.
Here was some thoughts I had on the matter.
Run a test for the following
Profitability on Close = Highest Close(Period:10,50,100) - if it often hits 2-5% higher - trending,
otherwise if it often loses (false breakouts) its a mean reverting market.
So tests to try
- Close = Highest Close
- Buy Low RSI vs Sell Low RSI
- Buy outisde Bollinger vs sell bollinger
- Buy Stochastics Low vs sell
- Close > Close[x]
Exits to test:
- Exit after X Bars
- Exit after mean rev (eg RSI goes from 20 to 80)
- Exit with a profit target
- Exit with donchian stop
Essentially though one would classify a trending market as, if I buy(long) a high and it continues on, otherwise if I buy(long) a low and often hits my bullish target its a mean reverting market.
Ive heard that Currency and Stocks tend to be mean reverting, and commodities tend to be trending. Then again am I completely missing the picture because they are all just cyclical?
Are there better tests, like a way to measure entropy gives you an idea?