For timing the mean reversion this is what I was talking about with the 12 hours. The following trades I refer to as “Secondary entries”.
The blue trend lines are to draw attention to the prolonged decline in the distance from the mean, they set off the counter. (The Red in general is a confirmation line).
I marked up the reversals that are defined by a beat of the current outlier and time: 8-12 hours or 2-3 4-hour candles. So, work out when the 3rd candle would start by comparing the broker’s time with your time zone.I am for instance 2 hours behind, so if the 3rd 4-hour candle was to start printing at 16:00, i should start looking for the beat of the outlier from 13:00 (the last hour of the 2nd candle). You can place pending orders too, but you would not know the entire size of the beat, which in an extreme case can be as much as 65 pips. So spread out your orders, pace them. A typical beat would be 4-20 pips, so you do want the placing orders maybe at 4, 8, 12 pips out – and add later. What you are aiming for is a mean reversion, so check where the green line was on the previous candle and use that as a reference.
The image that shows a 5-pips beat (on cue) is a shallow one. So a 4-pips pending order would get a fill, but no other. You could add to the position upon crossing back above the low of the candle (buy stop) a few pips out or above the high of the candle it prints.
Take some of the risk off the table when physically touching the green line (1/4 – 1/2) and adjust the remainder’s stop loss to somewhere in gains.
What about the chaotic looking bottom with the overall 75 pips beat?There is a projected distance beam, and you should not be buying before it gets its match. Start buying at that level.
When the extension was filled, the bottom was less than 30 pips away.
What happens when there is no beat in the next 12 hours? Price went after the projected distance value on the upside (a move was in progress still – an alternative approach would be to get in on the extension fill and target the missing beat). The beat may arrive later. In the last example the 9-pip beat was reverted back to the mean – and it was an extension fill as well.
Set the lookback value higher to browse more history on the indicator. A 4H time frame comes with about 162x candles of buffer.