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Mean Reversion Strategy: Spread Reversion 30M

Stratagys

The core structure of this strategy consists of the building of two currency indices among major currencies. These indices are then monitored in terms of volatility and momentum. When one of the indices starts to move rapidly in one direction and matches levels not seen in a while, the system looks for the other index displaying the same price behavior but in the opposite direction. It then synthetically builds a pair using both currencies. The pair being traded has a high chance of reversing the recent price movement because its two components have diverged in their trajectories.

The same set-up applies to all the time frames used, from 30-min to 4-hr: both indices have to be in opposite vertical movements. The movement in the underlying pair previous to the signal is not always indicative of an imminent reversal and therefore not easy to spot on the pair's price chart. The reason is that the potential reversal movement has its root in the individual currencies (expressed in the indices), and how these are performing against all other major currencies.

The Spread Reversion strategy may open a new trade strait after a loss if the entry conditions prevail in the same time frame. It may also happen the signal migrates to a higher time frame after a loss. It can even hold two opposing trades at different entry price levels at the same time, either based on the same time frame or different time frames. This strategy has a conditional stop based on the ATR(14) of the same time frame is used to enter the trade. Depending on the currency pair traded, it uses an asymmetrical risk to reward ratio between 1:3 and 2:4.

This strategy is based on 30-minute, 1-hour, 4-hour, and 12-hour close data. 1 Spread Reversion 30M