What is Mean Reversion Strategy?
Virat Kohli scored 0 and 5 runs in consecutive two matches of an ODI series against Australia. His batting average in ODIs is around 60. The chances of Virat Kohli making a half century in the next match increases because of the two reasons:
- He is a star player and always bounce backs with a great form
- The law of Mean Reversion kicks in
Just like gravity and Newton’s laws of motion, the law of mean reversion is embedded in nature and everything that rises will eventually gravitate towards its mean.
We will be choosing only F&O stocks for this strategy. However, the trades are all taken in cash market.
We will be using daily time-frame to filter out the stocks for Intraday trading in those stocks.
This system follows three very simple and basic rules for the entry:
- Previous Close Price > 200 SMA
- RSI(2) > 50
- Today’s % Change > 3%
The first rule helps us to find the underlying major trend of the stock. The second rule helps us to find if the stock is overbought or not. The third rule helps us to find if there has been an extraordinary up-move in the stock in a short period of time.
All these three rules helps us in finding whether the stock has reached a level after which it will revert back to its mean or moving average.
Let us say, today after the markets close, we scan all the F&O stocks and filter out the stocks that fit all of the above criteria.
Now, we will simply short all the filtered stocks at Previous Close Price + 1 % limit next trading day.
Entry Price = Previous Close Price + 1% of Previous Close Price
The target for that particular stock would be Entry Price – 6% and the stop-loss would be Entry Price + 3%
Stop-Loss = Entry Price + 3% of Entry Price
Target = Entry Price – 6% of Entry Price
There is no trailing stop-loss in this trading system. We will simply square-off the position in the stock at 03:15 PM.
You give a profitable trading system to people and many of them would still not be profitable. The single reason behind this is the fact that many of them are not able to face the losses which are a part of the system. Instead, they will try to tweak with the system and make it worse.
It is crucial to remain disciplined while following any trading system. Those who understand that losses are an essential part of the system and money is made only by being consistently following the trading system over the long term, have more odds of getting better returns.
The Telegram Bot
MarketScanner has a vision to bridge the gap between the Professional traders and new retail traders.
We, as retail traders make a lot of mistakes when following a system and get affected by a string of losses. We book our profits early and fear to book our losses. It is important to stay disciplined while following any strategy.
Staying disciplined is better said than done. Technology has helped humans a lot and here too technology comes to our rescue.
We at MarketScanner, have built a Telegram bot for Mean Reversion Strategy. This bot will help you remain disciplined and follow the strategy with automatic risk management based on your daily risk appetite.
You can watch the full demo of the bot here or you can simply watch the short demo in the following video.
You can also check the Live Performance page of Mean Reversion Strategy. This webpage displays the strategy statistics, PNL curve, Drawdown curve and Monthly returns to help you gauge the strategy performance regularly.
You can fill this google form to get a free trial of our bot for 7 days.
We hope that our bot will help you stay disciplined and follow the strategy to benefit from compounding returns over several years.
When you subscribe to this bot, you will get access to all our trading bots. We have also made a bot on Intraday Trend Following Strategy. So, you will get access to that bot as well. You can subscribe to all these bots using one of the following options:
- Rs. 3000 for 6 months subscription
- Rs. 5000 for 12 months subscription
Please enter your Personal Email ID and Telegram number while filling up the subscription form using the links below:
After Subscribing to this Bot, you will be added to MarketScanner Trading Bot channel where you will get the trading links in our Telegram Group well before the market opens, through which you can place your orders.
We are not providing an option to subscribe for less than 6 months as we believe you won’t be able to see the real returns of the strategy in such a short period. Remember, you make most money when you are compounding returns. So, it is always better to stick with the system for the long term.
The Mean Reversion bot automates the following:
- The whole process of scanning the stocks according to the strategy
- Adjusts stop loss and target if stock opens gap up above our entry price
- Order links every trading day well before the market starts
- Notifies users to squareoff the positions at 03:10 PM
- Updates the PNL of the day at 03:10 PM
- A dedicated webpage to track statistics of the strategy
As of now, Zerodha has been integrated with our bot. If you have any other broker, please write to us at email@example.com