Investing & Trading

Mean Reversion Swing Strategy

By Samantha Baltodano


TL;DR:

The Mean Reversion Swing strategy is a swing trading method that uses a specific pattern in the stock market called mean reversion sequence to identify potential buying opportunities.


To use the strategy, traders need to identify the sequence of three price movements that meet specific criteria, including an uptrend of at least 20 bars, a 50% retracement, and another uptrend of at least 0.5 dollars.


The strategy relies on mathematical calculations based on the concept of mean reversion, which states that prices will eventually return to their average value after a deviation.


Traders can use the strategy to generate trade signals and exit the trade when the price reaches a predetermined target or stop loss level.


You can access this indicator here.



What Is The Mean Reversion Swing Strategy?

Swing trading is a popular trading method that aims to capture short to medium-term gains in the market. The Mean Reversion Swing strategy is a swing trading strategy proposed by Ken Calhoun, which uses a mean reversion sequence to identify potential buying opportunities.


Simply put, the mean reversion sequence is a pattern in the stock market where the price of a security moves away from its average value or "mean", and then returns to it. 


In the Mean Reversion Swing strategy, traders look for a specific sequence of three price movements on a chart that meet certain criteria. When this sequence is detected, traders use it as a signal to buy the security.



How to Use the Mean Reversion Swing Strategy?

To use the Mean Reversion Swing strategy, you need to first identify the mean reversion sequence on the chart. 


The first segment is an uptrend that lasts for at least 20 bars and during this period, the price has risen by at least 5 dollars. 


The second segment is a 50% retracement, which means that the price has fallen by 50% of the previous uptrend. The precision of the retracement can be adjusted, but is set by default to 1%.


The third segment is another uptrend, where the price rises by at least 0.5 dollars. The entire sequence should not exceed 400 bars. 


When all of these criteria are met, a simulated long entry order is added.



Calculation Behind the Mean Reversion Swing Strategy

The Mean Reversion Swing strategy is based on technical analysis principles that use mathematical calculations to identify potential trading opportunities. 


Specifically, the strategy relies on the concept of mean reversion, which states that prices of an asset will eventually return to its mean or average value after a period of deviation.


The strategy uses a 50% retracement level, which is calculated by measuring the percentage of the previous uptrend that has been re-traced. This retracement level is significant because it represents a balance between buyers and sellers in the market. 


When the price reaches this level, traders can expect the price to reverse and move back in the direction of the uptrend.


To implement the strategy, traders can customize parameters such as the length of the uptrend and the amount of retracement tolerated. By doing so, they can adapt the strategy to fit their trading style and preferences.



Trade Signals

Traders can use the Mean Reversion Swing strategy to generate trade signals. When a mean reversion sequence is detected on the chart, a long entry order is added. Traders can exit the trade when the price reaches a predetermined target or stop loss level.



Test The Mean Reversion Swing Strategy

Great news! 


You can back test this exact strategy on historical data for any of your favorite symbols using TradingView. 


This strategy has already been built and all you have to do is log in and take it for a spin. You can access this indicator here.


If you’re new to back testing and to TradingView, don’t worry. I created a step-by-step guide you can follow to begin testing the Mean Reversion Swing Strategy.



Summary

  • The Mean Reversion Swing strategy is a swing trading method that uses a mean reversion sequence to identify buying opportunities.
  • The mean reversion sequence is a pattern where the price of a security moves away from its average value and returns to it.
  • To use the strategy, traders must identify a sequence of three price movements that meet specific criteria, including a 50% retracement and at least two uptrends.
  • The strategy is based on mathematical calculations and the principle of mean reversion, which suggests prices will return to their average value.
  • Traders can use the strategy to generate trade signals and exit trades when the price reaches predetermined targets or stop loss levels.


Mean Reversion Swing is just one of many strategies that Archaide automates. For a full list of strategies and studies available click here.


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