The Mean Reversion Forex Strategy is a reversal approach that centers on the concept of returning to the mean following the price's movement into designated overbought or oversold territories, typically signaling a potential price reversal. Rooted in Mean Reversion theory, the Mean Reversion Channel serves as a graphical representation of critical market dynamics.
The Inner Channel delineates Dynamic Support and Resistance levels, while the Outer Channel highlights the Overbought/Oversold Zone. These zones often indicate periods of consolidation or impending reversals, often triggered by unsustainable price movements.
This strategy utilizes the SuperSmoother Moving Average with an extended lookback period, typically set to 200, enhancing the stability of the channel lines. Furthermore, this indicator incorporates a secondary level, facilitating the visualization of both inner and outer channels.
Setup Strategy
Time Frame: 5 minutes or higher.
Currency pairs: any, including cryptocurrencies.
TradingView Indicator:
MRC Hic3 SuperSmoother 2000
(Search for indicators in TradingView > Indicators > Community Scripts > search for the indicator's name.)
Trading Rules
Two approaches are proposed for interpreting this Mean Reversion model:
First Approach
Buy
Enter a buy order when the price touches the first line of the lower channel (2°).
Sell
Enter a sell order when the price touches the first line of the upper channel ().
Exit
Set stop loss at 3-15 pips depending on the timeframe, above/below the lower/upper line of the second channel.
Profit Target Ratio: Stop loss 1:1, trailing stop, or channel lines as the price target.
Second Approach
Buy
Wait for a Stochastic buy signal when the price touches the lower channels.
Sell
Wait for a Stochastic sell signal when the price touches the upper channels.
Exit
Set stop loss at 3-15 pips depending on the timeframe, above/below the lower/upper line of the second channel.
Profit Target Ratio: Stop loss 1:1, trailing stop, or channel lines as the price target.
Follow up to 5 Stochastic buy or sell signals, avoiding the use of Martingale and Fibonacci progressions.
In conclusion, if executed adeptly by proficient individuals, this strategy can yield satisfactory results. The second option tends to be simpler to implement.
Trading Examples: The figure below illustrates the application of D'Alembert to this trading system. AUDUSD, 30-minute timeframe, Profit Target: 20 pips, Stop Loss: 20 pips, Position Size: 1.
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