Standard Deviations, Moving Averages and Reversion to the Mean

For my money, most people make e-mini trading an exercise in futility, bizarre theory, and interpretation of crazy indicators. Had I started trading outside the halls of an institution I suppose I wouldn't know where to start; this business is fraught with as many crazy ideas as crazy indicators. I don't think it has to be that hard. One of the first principles of trading is that prices tend to move from overbought to oversold and oversold to overbought in a manner that rarely strays from a mean price. You can take advantage of this tendency and profit, though few people actually trade Reversion to the Mean effectively.

Back in my college statistics class, we learned that standard deviation is a measurement that is used to objectively quantify the amount of variation in a given dataset. That definition works pretty well for explaining levels of excessive buying (overbought conditions) and excessive levels of selling (oversold conditions) and can give you an insight into when buying levels have exceeded expectations and sellers are likely to enter the market and vice a versa, when selling levels have exceeded expectations and buyers are likely to enter the market. In e-mini trading, I have been tinkering with this idea for nearly 10 years and defining an optimal Simple Moving Average that best represents an acceptable mean price that is uniquely useful for e-mini scalping. This was not the easiest of things, as e- mini scalping is much shorter in time and market breadth than calculations used in e- mini swing trading. (Where reversion to the mean trading is more common)

Without wandering into a lengthy mathematical explanation of how I have arrived at the numbers that best fit my e-mini scalping style, I can say that for most people and average between 200 and 300 will serve you well. I stick with Simple Moving Averages because an Exponential Moving Average weights the most recent price action in calculating a line plot. This is not a helpful attribute when looking at a 200 period data string and distorts the true mean you are trying to determine.

My standard deviation (SD) settings are higher than I expected, but for my trading style they seem to have worked well over the last 3 to 4 years. I generally use a channel with the inside ring the lowest standard deviation (SD 1.5-2.4) level that will produce a reversion to the mean and the outside ring(SD 2.8-3.5) is generally the extreme point where you can expect a powerful reversion to the mean. With about 4300 trades recorded and charted, I've had a range of results (depending on volatility conditions) that varies from 78% success on the low side and 85% on the high side. Like all things in trading, reversion to the mean is an exercise in probability and market conditions are a prime variable in determining Reversion to the Mean success.

The day got rid of all the goofy indicators and oscillators and learned Reversion to the Mean, order flow, and began to understand price action was an important day in my e-mini trading life.

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Learn Using Indicators the Right Way in Binary Options Trading

When traders learn using indicators the right way, it can prove to be a valuable tool to make money in the binary options market. There are many types of indicators available in the market and the parameters they measure are momentum, volatility, trend and volume. You can use one or more indicators to measure a single parameter.

Trend indicators and oscillators

Trend indicators can be used to spot reversals of the trend or can be used to spot support and resistance. Oscillator indicators move around a specific level or move between upper and lower level. Traders make use of these technical indicators to determine whether the market is overbought or oversold. This can enable the trader to get a good signal when the divergence is drawn between the price action and the oscillator.

The popular trend indicators include:

• Bollinger bands,
• channel,
• Ichimoku Kinko Hyo,
• moving average and
• parabolic SAR.

Popular oscillator indicators include:

• MACD (moving average convergence divergence),
• momentum,
• RSI (relative strength index),
• RVI (relative vigor index) and
• stochastic oscillator.

Mistakes to avoid in using technical indicators

One of the biggest mistakes that traders make when they are using technical indicators to trade is that they use too many of them and this can be confusing. Each technical indicator gives specific trading signal.

If for example the trader uses four trading indicators they can get four different trading signals. If these different signals do not appear at the same time it can lead to a lot of confusion and the trader many make wrong entry points. This can result in loss making trades.

The other big mistake that traders need to avoid is using many indicators from the same category. If you have 3 - 4 trend indicators giving the same trading signal it does not mean that the trade will definitely be profitable. It is important to learn about the specifications of each indicator to be able to trade successfully with them.

Most successful traders tend to combine technical indicators with fundamental, sentimental and news indicators to get a broader picture of the market. This enables them to enhance the results and increases the potential to make profits.

One the downside if you use more indicators you may become confused with the large volume of information. It can also become difficult to monitor the signals in an effective manner.

When you learn using indicators the right way, you may be able to save a lot of time and effort in understanding the price momentum of the underlying asset.

Most traders tend to get overwhelmed with too much of information and clever use of indicators can help avoid this scenario. It is best to make use of them to measure various aspects of the trade so that you are able to make profits consistently.

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