Designing a Powerful Mean Reversion Trading Strategy

A Double Trouble Trading Strategy For Powerful Market Reversals

Sofien Kaabar, CFA

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Mean reversion is a concept in technical analysis that suggests that prices tend to revert to their historical average over time. In other words, when a price deviates significantly from its average value, there’s a tendency for it to eventually move back towards that average.

For example, let’s say a stock’s price typically fluctuates around $50, but due to some event, it suddenly jumps to $70. According to mean reversion theory, there’s a likelihood that the price will eventually move back closer to $50.

This article presents a strategy that combines two powerful technical indicators to generate reversal signals.

A Refresher on K’s Reversal Indicator II

K’s Reversal Indicator II uses a moving average timing technique to deliver its signals. The code is available on TradingView, so do not burden yourself with the calculation. The method of calculation is as follows:

  • Calculate a moving average (by default, a 13-period moving average).
  • Calculate the number of times where the market is above its moving average. Whenever that number hits 21, a bearish signal is generated, and

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