A Simple Mean Reversion Strategy - MT4/MT5 Resources

Today I want to share what I consider to be the most interesting trading strategy that I personally use.

It's simple, it's effective, and anyone can do it. Not only that, but you can use it on any time frame, depending on how much time you want to spend in front of the chart.
Some people really like to spend a lot of time on their charts, while others only want to look at them a few times a day to adjust their position. No matter where you fall on the spectrum, this strategy will work for you.

While on the surface this strategy looks very simple and easy to follow, I'm going to dig deeper into its inner workings from a market structure perspective.
That being said…

Let's start with indicators. Only 1 indicator is needed and that is the 200 MA (Moving Average). This is what we consider the "fair value" of any given currency.
We know the price will always return to its "fair value," so that's where we want to exit the market. When prices are above/below "fair value," that's where we want to be in the market.
So the entry and exit rules are simple:

1. If the price is higher than "fair value," we can sell the asset. Once the market returns to "fair value" we exit the short position.
2. If the price is below "fair value," we can purchase the asset. Once the market returns to "fair value" we exit the long position.

In addition to these core rules, you can use price action, RSI, or other indicators to tailor your strategy to specific entries any way you like. I’ll share more of my personal sauces later…

At this point, most of you reading this are probably thinking, “There’s no way this guy is serious…” However, I can assure you, I am. Here are the results I had last month trading this strategy on EUR/GBP using the 1H chart:

A quick overview is that my win rate remains around 80%, I earn an average of 5.9 pips per trade, and my VaR is -187. My median profit is about 15 pips and my median loss is about 20 pips.

This is what it looks like month after month…

There's a caveat to this strategy, though... it only works if you manage your account like a real business, making a profit by buying and selling perishable products.

I’ll get into this in more detail later, but essentially it boils down to this: you need volume to consistently get consistent returns. Not the number of sizes, but the number of transactions. This means you have to do two things:

1. keep it small
2. Frequent transactions

A brief example to illustrate this point. Imagine a grocer selling tomatoes. Based on current market demand, they estimate they can sell $100 worth of tomatoes next week, and they expect to earn $1 for each tomato sold. But they have $3,000 in cash.

Their expected value for each tomato trade is $1.00, so mathematically speaking, why not buy $3,000 worth of tomatoes?

Although they could try to buy $3,000 of tomatoes to sell next week, the likelihood of $2,900 worth of tomatoes going bad is very high and it would be foolish to buy that many tomatoes.
The expected value of the first $100 of tomatoes is substantial. However, the expected value beyond that point goes straight to -100%, and the further you go beyond that, the faster you eat up the gains from the first $100 of tomatoes.

They have to keep tomato production small and use the funds for other products.

The same goes for this strategy. Depending on when you enter the market, there is a limit to how much you can bet on any single position or leg, and if you go beyond that, you are taking the edge off the system by taking on excessive risk that will almost certainly not pay off, similar to the extra $2,900 worth of tomatoes you can buy at the grocery store.

This is similar to planning risk around the size of the average or median loss.

Now, even though the median loss is very small, you can see that the value at risk is actually quite large. This is important to understand because when you think about risk, this is the number you need to make all your decisions.

If you use the median or even the average loss instead, you're taking on too much risk that will almost certainly not pay off, causing you to lose money so fast it'll make your head spin. Mainly because when drawdowns inevitably occur, you'll quickly find yourself overleveraged.

Therefore, when you plan your risk, assume that the risk for each position is VAR, not your average or median loss. This will keep you small, allowing you to trade frequently.

This is enough for an introduction. I will post my trades here to provide an example of how to use this strategy. If time permits, I will also post an in-depth exploration of the above areas. This will include the following:

1. Hidden risks
2. Estimate the shrinkage rate of "inventory".
3. Treat your portfolio like a business.
4. Theoretical modeling drives the advantages of this strategy.

There's more!