Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

NONDIRECTIONALLY BIASED MEAN REVERSION SYSTEMS

Seven-Period Reversal

The seven-period reversal works because it generates trades only when markets are extremely overbought or oversold. For example, sell signals are initiated only when markets can move consistently higher for seven consecutive bars and then reverse direction on the most recent bar. This strategy differs from the mean reversion systems discussed so far in that it generates buy or sell signals only when the market has reversed its short-term trend (at least during the most recent bar).

Although there are many successful ways to exit this system, I will employ a seven-period reversal criteria along with profit targets and fail-safe stop loss exits set to 1 percent of entry price.

Long Entry:

Close(@)[–8] > Close(@)[–7] AND
Close(@)[–7] > Close(@)[–6] AND
Close(@)[–6] > Close(@)[–5] AND
Close(@)[–5] > Close(@)[–4] AND
Close(@)[–4] > Close(@)[–3] AND
Close(@)[–3] > Close(@)[–2]
AND Close(@)[–2] < Close(@)[–1]

Long Exit—Condition #1:

Close(@)[–7] < Close(@)[–6] AND
Close(@)[–6] < Close(@)[–5] AND
Close(@)[–5] < Close(@)[–4] AND
Close(@)[–4] < Close(@)[–3] AND
Close(@)[–3] < Close(@)[–2]
AND Close(@)[–2] < Close(@)[–1]

Long Exit—Condition #2 set “Price” field to:

EntryPrice(@,0,All,ThisTradeOnly)+(.01*
EntryPrice(@,0,All,ThisTradeOnly))

Long Exit—Condition #3 set “Price” field to:

EntryPrice(@,0,All,ThisTradeOnly)-(.01*
EntryPrice(@,0,All,ThisTradeOnly);

For short entry, along with short exit codes for condition ...