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Fade the extremes; trust the average.
Mean reversion assumes price oscillates around a statistical average. When price stretches too far from the mean — measured by Bollinger Bands, RSI, or z-score — the strategy fades the move, betting on a return to the middle. Best in ranging markets; fatal in trends.
Price tags the outer Bollinger Band (2 standard deviations).
Statistically extreme — 95% of price action lives inside the bands.
RSI(14) is above 70 (for shorts) or below 30 (for longs).
Confirms momentum is stretched, not just price.
Wait for a reversal candle (engulfing or hammer) back inside the bands.
Confirms the stretch is exhausting, not accelerating.
Confirm the broader market is ranging, not trending (ADX < 25).
Mean reversion fails in strong trends — ADX filters them out.
Target: the 20-period SMA (the Bollinger middle band).
The statistical mean — where price should revert to.
Stop loss: 1 ATR beyond the entry candle's extreme.
Gives the trade room to breathe but caps the loss if the stretch continues.
Time stop: exit after 10 candles if target not hit.
If reversion hasn't happened by then, the regime may have shifted.
Defines the statistical envelope for extremes.
Confirms momentum is stretched.
Filters out trending markets where mean reversion fails.
The mean — reversion target.
Trailing stop
Not used — fixed target at the mean.
Pros
Cons
Catch the explosion after the compression.
Breakout trading waits for price to compress inside a range or pattern, then enters in the direction of the breakout with a stop inside the former range. The thesis: low volatility begets high volatility, and the breakout is the inflection point.
High-frequency edge with surgical risk control.
Scalping captures small moves (5-10 pips) on the 1-minute chart using exponential moving average ribbons and momentum confirmation. The edge is small per trade but compounds with frequency. Requires fast execution, tight spreads, and iron discipline.
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Open the Risk Calculator with the strategy’s recommended risk percentage already in mind.
