At Your 'mean'

[zdo 20]

Question setup:

For commonality, “the mean” in the question below is your own ‘mean’ – a place where price has ‘reverted back to’. That means it’s not specifically or necessarily a central tendency (like an average) or a measure of valuation (like a value area) or whatever … it’s simply whatever your ‘mean’ is.

There are piles and piles of threads in trading forums on reversion to the mean methods, techniques, strategies, and tactics. Even though traders don’t typically use the term, there are also piles and piles of threads on ‘excursion from the mean’ methods, techniques, strategies, and tactics.

For the most part these are described as new trend if price has just properly crossed through your ‘mean’ or resumption of trend after correction if the ‘mean’ held, etc. etc. but in essence they are about excursion from 'mean’

It may literally fall into the stupid question bin and if you don’t use a ‘mean’ or make trading decisions or executions at your ‘mean’ as described above, then please ignore question. And thanks...

 

Now finally the question - Do you have something that is distinct / atypical that you do when price comes back to your mean?

[Tams 20]

there are many interpretations of mean....

 

arithmetic mean

 

geometric mean

 

psychological mean

 

philosophical mean

 

dynamic mean

 

and so on ... ... ... ...

 

 

 

the best qualified mean in the market is the daily closing price.

[SIUYA 11]

i have also wondered this over the years and have generally ignored it because the mean is usually a moving number as well - so the mean can actually move to where you bought or sold it rather than the price reverting back to the mean. Plus its another personal measure.

 

I dont trade this way, but the closest I have seen someone incorporate this successfully is in two ways - bollinger bands using it as a level to reduce positions or exit them at extreme (by their measure) excursions from the previous price levels, and I have seen some others that use it as an entry zone for trend following and trying to time reversals in a trend back to a MA (similar to Option timers project here on TL) http://www.traderslaboratory.com/forums/trading-psychology/10158-optiontimers-project-25.html

[zdo 20]

there are many interpretations of mean....

 

arithmetic mean

 

geometric mean

 

psychological mean

 

philosophical mean

 

dynamic mean

 

and so on ... ... ... ...

 

 

 

the best qualified mean in the market is the daily closing price.

 

Thanks ... surprised you forgot to mention the golden mean...

Also, some might argue with you that the best qualified mean is the opening price ... instead of the closing price...

 

anyways re the "many interpretaions" and

 

One more time - just for you Tams :haha:

 

"For commonality, “the mean” in the question below is your own ‘mean’ – a place where price has ‘reverted back to’. That means it’s not specifically or necessarily a central tendency (like an average) or a measure of valuation (like a value area) or whatever … it’s simply whatever your ‘mean’ is."

 

Thanks for any help with the question you got for us.

[Tradewinds 12]

Do you have something that is distinct / atypical that you do when price comes back to your mean?

 

I don't know if what I do is distinct or atypical. I have no way of determining what is typical. I guess the typical person looses money, so if someday I make money, I suppose I'll be atypical. :rofl:

 

This question makes me think of situations where the market decides it was going in the wrong direction, and suddenly has a different bias. Maybe due to unexpected news.

 

If price changes direction and very quickly returns to "The Mean", I guess I expect it to continue to previous levels very quickly. It would be like if you suddenly realized that you got the value wrong, and something really was worth that price. Oops! Better get back to the previous price as fast as possible.

[Do Or Die 10]

Do you have something that is distinct / atypical that you do when price comes back to your mean?

 

re-validate my mean

 

PS: don't know though if its distinct/atypical. with zillions of perceptions and opinions thrown around forums I feel everything I do is distinct :rofl:

[calsprdr 10]

My two cents...

 

The is no particular evidence that prices revert to the mean... look at Apple.

 

However from a statistical standpoint there *is* evidence that *volatility*

reverts to the mean. Volatility can really only be taken advantage of in the

world of options. When volatility reverts to the mean then options are becoming

more overvalued or undervalued depending on whether implied volatility is above

or below that mean. Then option traders switch from selling premium to buying

premium or vice versa.

[Tams 20]

My two cents...

 

The is no particular evidence that prices revert to the mean... look at Apple.

 

....

 

that's because you are looking for a slow fractal mean in a fast fractal market.

[zdo 20]

...

This question makes me think of situations where the market decides it was going in the wrong direction, and suddenly has a different bias. Maybe due to unexpected news.

 

If price changes direction and very quickly returns to "The Mean", I guess I expect it to continue to previous levels very quickly. It would be like if you suddenly realized that you got the value wrong, and something really was worth that price. Oops! Better get back to the previous price as fast as possible.

 

Tradewinds,

 

Real time example to see if I get what you're saying - the EJ has quickly returned to a cluster of 'means' (see rectangle of attached 180 minute EURJPY) Are you saying you'd play it to go back to 114 ? Thanks

 

zdo

[calsprdr 10]

that's because you are looking for a slow fractal mean in a fast fractal market.

 

It's true I'm talking about longer time frames, but even on short time frames prices tend to oscillate around a mean. When prices don't move through the mean but bounce off in a rejection pattern, that is usually a pretty good signal to trade in the direction of the bounce.

 

The traders "out there" watch various moving averages very carefully and so when prices get near them you might want to be deciding if any crowd-induced price action is occurring.

[calsprdr 10]

Tradewinds,

 

Real time example to see if I get what you're saying - the EJ has quickly returned to a cluster of 'means' (see rectangle of attached 180 minute EURJPY) Are you saying you'd play it to go back to 114 ? Thanks

 

zdo

 

I would expect it to test a support/resistance level first, say 112.25 (see prices on 7/20 and 7/24). After the August drop it did that (to the 110.50 area) and after the 8/4 jump it's testing the S/R level from 7/28. 114 just seems too optimistic to me, particularly since it spent little time there.

[zdo 20]

Tams,

If you have time, could you please define / amplify how you are using the terms

"slow fractal mean" and

"fast fractal market"

??

Thanks

[Tams 20]

My two cents...

 

The is no particular evidence that prices revert to the mean... look at Apple.

....

 

that's because you are looking for a slow fractal mean in a fast fractal market.

 

Tams,

If you have time, could you please define / amplify how you are using the terms

"slow fractal mean" and

"fast fractal market"

??

Thanks

 

this might help

 

[Tams 20]

click on image to enlarge

 

[zdo 20]

I would expect it to test a support/resistance level first, say 112.25 (see prices on 7/20 and 7/24). After the August drop it did that (to the 110.50 area) and after the 8/4 jump it's testing the S/R level from 7/28. 114 just seems too optimistic to me, particularly since it spent little time there.

 

TradeWinds, After your general idea, I wasn't expecting such a detailed answer . Anyways - thank you very much

TradeWinds

Edited August 4, 2011 by zdo

[calsprdr 10]

TradeWinds, After your general idea, I wasn't expecting such a detailed answer . Anyways - thank you very much

TradeWinds

 

No, I'm not Tradewinds, just some guy who butted in

[zdo 20]

No, I'm not Tradewinds, just some guy who butted in

 

calsprdr, just messin' with you...

 

My illustration was a question to see if I had the right idea of what TradeWinds was saying. I could care less about how that particular situation works out.

 

Seriously, re

114 just seems too optimistic to me, particularly since it spent little time there

how long it spent there, etc. was part of my question about the whole concept to him..

[zdo 20]

this might help

 

nonvrbl comunikshn

 

see attached

 

 

Trying to keep up, Tams …

Does these pictures have anything to do with the OP question? Thanks.

[zdo 20]

The question is the answer…

Generally (and somewhat in terms of trends), I am repeatedly assessing the probabilities of whether the current move back to my ‘mean’ is a correction and the mean ‘value’ will hold and the current trend resume or price will cross mean and a new ‘trend’ form with my ‘mean’ / ‘value’ now moving in the other direction from the direction it was moving at the most recent extreme before the reversion.

 

One of my almost daily practices is to ask myself “what can I do tomorrow to make myself an even better trader?” and/or “what can I do today to trade even better?”

In that spirit, this question unfolded about certain systems as it occurred to me that in the evolution of my skills and platform representations, I’ve become more ‘unconsciously competent’ and precise at assessing, measuring, and trading ‘reversion to’ than I have at ‘excursion from’ ‘means’. Proficiency with the ‘excursion from’ ‘mean’ trading is less elegant and results are also less consistent– intermittently / sometimes almost automatic, other times out of phase… in certain systems.

 

…will try to refine the question. To start, we can remove the “distinctive” part from the question… was trying to avoid a rehash of methods “everybody” already knows about… and the question is still not about valuation or quantifying a valuation or where or how to place a ‘mean’. Thanks all.

The question is the answer…

[calsprdr 10]

The question is the answer…

 

Oh no zdo, now you sound like Tams

[SIUYA 11]

One of my almost daily practices is to ask myself “what can I do tomorrow to make myself an even better trader?” and/or “what can I do today to trade even better?”

In that spirit, this question unfolded about certain systems as it occurred to me that in the evolution of my skills and platform representations, I’ve become more ‘unconsciously competent’ and precise at assessing, measuring, and trading ‘reversion to’ than I have at ‘excursion from’ ‘means’. Proficiency with the ‘excursion from’ ‘mean’ trading is less elegant and results are also less consistent– intermittently / sometimes almost automatic, other times out of phase… in certain systems.

 

…will try to refine the question. To start, we can remove the “distinctive” part from the question… was trying to avoid a rehash of methods “everybody” already knows about… and the question is still not about valuation or quantifying a valuation or where or how to place a ‘mean’. Thanks all.

The question is the answer…

 

There is two parts (or three really if you think that Tams and Zdo are mean reverting to some sort of super average being (does super average exist ??))

 

Part one - the method of trading - mean reversion or mean excursion

Part two - your definition of mean

 

both a personal, both adoptable......

 

When you boil it down, two traders can use the same mean, with different methods, and both get good results - it then becomes a matter of cutting losses for both when wrong, running profits, or taking profits will differ between the two, and the end stats will be highly likely to be different in terms of risk:reward, and winners v loosers stats....assuming this is measured over a wide enough time frame and various markets.

[Tradewinds 12]

Tradewinds,

 

Real time example to see if I get what you're saying - the EJ has quickly returned to a cluster of 'means' (see rectangle of attached 180 minute EURJPY) Are you saying you'd play it to go back to 114 ? Thanks

 

zdo

 

Whenever price suddenly surges, like in your attached chart, I tend to have a bias towards believing there was some underlying reason that will continue to be valid in the very short term. So, I would seriously consider that the EJ would go back to 114, BUT it depends. I guess the scenarios would be:

 

• Huge price move up - No major news at the price move, price reverts to mean
  
• Huge price move up at the point of major news, price reverts to mean
  
• Huge price move up on good major news, and more major news came out shortly afterwards that was bad, and price reverted to the mean.
  

 

If the price spiked up hard with no major news, I tend to have a bias towards believing that the underlying reason for the big price move will remain valid for the very immediate short term. In this case, I would have a bias towards believing there was a high probability that price would return to 114.

 

If the news came out immediately before the huge spike up, AND there is no other major news coming out, or not coming out for a few hours, I would also have a bias towards the price returning to 114.

 

If the huge spike up was good news, and the huge spike down was bad news, I would not assume that any levels were going to be revisited. In this last case, my assumption is that the reversion to the mean was an, "Oops! We got it wrong! Better get back to the mean as fast as possible."

 

In the first two cases, the reversion to the mean is not an "Oops! We got it wrong." I think of it as simply the market clearing out transactions and reverting to the mean before the next move up.

 

I use NYSE Internals to help me understand what the ES is doing. So I'd also be looking at the Advancers/Decliners and Up Volume/Down Volume for subtle clues as to what kind of "pressure" was being exerted on the price.

 

I know nothing about Forex, and have no desire to trade it unless there was something other than price that correlated to price movements.

 

Of course, it could get more complicated. You could look at what was happening on the longer term. Multi-day levels. Weekly level.

 

There's also the issue of volatility. If there is bigger than normal price moves, the trends aren't any different, it's just that the scale is different.

Edited August 5, 2011 by Tradewinds

[jpennybags 11]

Hey guys… interesting discussion. What I have to add is more a question than a statement; please keep that in mind. My understanding of mean reversion and how it would be represented in market price on a chart would be more of a stair step pattern rather than a moving average pattern, and would represent a market consensus on price through each cycle of buying and selling (high to low - low to high… whatever the time frame).

 

In a downtrend, selling momentum would carry the price below the mean - a measurement further below the mean than the high measurement was above it. In the next down leg, the mean would have been dragged lower due to the momentum from the previous move down.

 

A market reversal and beginning of an uptrend would begin as buyers then moved the price measurement further above the mean than the measurement from last low. Subsequently, as buying momentum continues to move the price a greater measurement from the mean than the last swing low measurement the price continues higher until it can no longer move the price greater than the measurement from the last swing low… then the cycle begins again.

 

My understanding… as price moves through cycles of high to low (low to high) the market consensus of the "mean" moves with the trend in a stair step fashion, with price falling through the mean, or rising above it. Someone square me away if the notion is ill conceived.

[zdo 20]

...more a question than a statement; please keep that in mind. My understanding of mean reversion and how it would be represented in market price on a chart would be more of a stair step pattern rather than a moving average pattern, and would represent a market consensus on price through each cycle of buying and selling (high to low - low to high… whatever the time frame).

 

...

 

My understanding… as price moves through cycles of high to low (low to high) the market consensus of the "mean" moves with the trend in a stair step fashion, with price falling through the mean, or rising above it. Someone square me away if the notion is ill conceived.

 

Your understanding that the ‘means’ (whether they be moving averages, stairsteps, or whatever.) move with ( and lag ) the trend is generally accepted across the board and is not ill concieved. The notion of 'value area' moving in discrete quanta is probably more useful than the concept of a 'mean' moving continuously and more smoothly.

I would suggest you look a little deeper into your preconceptions about “market consensus of the "mean"” though…

 

“Mean reversion” has been thoroughly treated in the trading literature. “Mean excursion”, too, although not explicitly in those terms as much. But, besides MA crossover crap and content about retracement to 'mean' , specifics of methods, techniques, etc. ie basically taking trades at one’s ‘mean’ hasn’t garnered much discussion. That is what this thread is about.

 

Folks, should we infer from the lack of exposition elsewhere and dearth of comment on methods in this thread that traders are making most entries before or after price has contacted ‘mean’, but few are making trades at their ‘mean’? Boys if that's the case...

[Tradewinds 12]

Folks, should we infer from the lack of exposition elsewhere and dearth of comment on methods in this thread that traders are making most entries before or after price has contacted ‘mean’, but few are making trades at their ‘mean’? Boys if that's the case...

 

Boys, Oh Boys, Oh Boys! It's makes you wonder! :rofl:

 

I really only care about the mean reversion after an unusually big price move in a short period of time, or an extended, steady price move. Other than that I'm looking to exit at price extremes, and re-enter at a better price if I think the trend will continue. If i don't think the trend will continue, I'm looking to enter at price extremes.