Comments on: Be careful with mean reversion trading http://theessentialsoftrading.com/Blog/index.php/2009/04/03/be-careful-with-mean-reversion-trading/ Information and resources for those looking to learn about trading and the markets Wed, 23 May 2012 13:10:54 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Tim http://theessentialsoftrading.com/Blog/index.php/2009/04/03/be-careful-with-mean-reversion-trading/#comment-13822 Tim Fri, 03 Apr 2009 14:45:40 +0000 http://www.theessentialsoftrading.com/Blog/?p=1140#comment-13822 While it's worth pointing out the dangers of reversion to the mean, I believe you made quite a few inaccuracies. Firstly regression to the mean does not require a normal distribution, it doesn't even require a symmetric distribution. Also, it does not apply to volatility, which itself is a statistic measure. For the same reason you can't apply traditional TA to the VIX which many people try to do. The problem with it is that it assumes that the distribution of prices remains fixed over the period that you use it. Unfortunately, you have no way of knowing this is the case, unless you knew the future. So unsurprisingly, it all it does is convert the guesswork of forecasting stock prices into guesswork for forecasting distributions. While it’s worth pointing out the dangers of reversion to the mean, I believe you made quite a few inaccuracies.
Firstly regression to the mean does not require a normal distribution, it doesn’t even require a symmetric distribution.
Also, it does not apply to volatility, which itself is a statistic measure. For the same reason you can’t apply traditional TA to the VIX which many people try to do.

The problem with it is that it assumes that the distribution of prices remains fixed over the period that you use it. Unfortunately, you have no way of knowing this is the case, unless you knew the future. So unsurprisingly, it all it does is convert the guesswork of forecasting stock prices into guesswork for forecasting distributions.

]]> By: David http://theessentialsoftrading.com/Blog/index.php/2009/04/03/be-careful-with-mean-reversion-trading/#comment-13821 David Fri, 03 Apr 2009 14:38:45 +0000 http://www.theessentialsoftrading.com/Blog/?p=1140#comment-13821 I may be guilty of using the term to describe the successful patterns both myself and subscribers to Trade-Ideas have taken advantage of recently. I agree that taking principles that work to describe phenomenon in other unrelated fields and applying them to capital markets is risky, but 1) terms must be described in order to be understood and 2) applying these strategies a good trader understands there is a 'black swan' ;) out there that can end a strategy's trend. You cant tell yourself I wont exploit a strategy because it may end. Like any trend - find it, ride it, and then get off it. I may be guilty of using the term to describe the successful patterns both myself and subscribers to Trade-Ideas have taken advantage of recently. I agree that taking principles that work to describe phenomenon in other unrelated fields and applying them to capital markets is risky, but 1) terms must be described in order to be understood and 2) applying these strategies a good trader understands there is a ‘black swan’ ;) out there that can end a strategy’s trend. You cant tell yourself I wont exploit a strategy because it may end. Like any trend – find it, ride it, and then get off it.

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