What does mean reversion really mean? How does it work (for real)?
Mean reversion kicks in when an overly extended condition finally lets go. Much like the rubber band that reverts to slap your skin.
What is the mean? There are different means for different time frames, but the one I am using is the 15-minute LEMA. This means 828 sample, but since I have 30-minute charts open, I use 414 EMAs pulled on the highs and the lows. This band gets re-visited 3 times per month on average with the certainty of death VS a 200 day MA that may not be seen back for years.
It can be stated that all mean reversions start from Bull Zone 1 and Bear Zone 1.
I define these zones being 1-3 fluctuation maximums away from the individual bands of the mean.
Sort term bulls/bears would manage to stretch the price not much further than the 1x fluctuation maximum, whilst middle weight, better capitalized players would cover about 2.5-3x fluctuation maximum away. Anything beyond this level of stretch would be an institutional buying: constant accumulation is needed to keep up the overstretched condition.
A valid let go thus occurs in the Zone 1 and a sharpened stochastic bars can help you find the spot.
What happens next is an impulse wave structure (5 waves) that would take you back to… where the mean was at the time of the trigger (end of wave 3), and an extension on top of that (wave 5).
Figure shows the (wave 3) target at hand.
Wave 5 would normally beat the touch down by 1/2 of the fluctuation size to fluctuation maximum.
The move back up and the fall back half way after the wave 5 target was reached, was the settlement, the reset, not a wave of any sort, this is something that E.W. can not account for when wanting to call every move a part of a structure.
This is everything you need to be able to make a killing in Forex.
I did not learn any of the above from anyone, these are my own findings.
The lingo traders use helped me with what to look for. Being a Hungarian I am very much used to the language passing down thinking logic.
The above version of LEMA30N can be obtained gratis when purchasing a copy of my book.
Stochastic Bars Mixed can be downloaded freely from this blog.