[Geko]

This thread is the place to discuss about Reversal Trading also known as CTT Counter Trend Trades.

CTT trading should be done carefully as you are trading against the main relevant trend.

It really important to understand that reversal trading is not a trading style that predicts whether markets are going to turn and try to trade the absolute high and low. It would be like trying to catch a falling knife.

With Reversal Trading, a mean reversion trader for example, would be looking for opportunities where price has moved away from its mean (or average) price significantly to trade the reversal to the mean.

As reversal trading is risky, it requires a very strict entry management, a risk management approach and an emotionally stable character to avoid things such as revenge-trading or over-trading.

GiG as a forum is the good place to share and confront different views to help each other.

Your opinion and ideas are more than welcome!!!

[Geko]

TMA – 3 % Rule reversion

In this post, I am going to share with you one method which could be used to detect when price has moved significantly away from its mean and to trade the reversal to the mean.

This method could be called OOM (Out Of Market).

According to some guys, there is a kind of induce rule from the IMF (International Monetary Fund), the 3 % rule.

When price has moved more than 3 % from its Fair Market price (mean price), Market Makers have 24 hours to bring price back inside this range (into compliance) or the IMF will intervene.

This Fair Market price could be estimated with a Moving Average with the following settings:

FM MA: TF H1, Period 61, Shift 0, Method Linear Weighted, Price Close

Here is a screenshot showing the levels, in red upper and lower Extreme at a 3 % shift:

3P1.png

This was the main idea, the MA could be changed for a 56 or 54.

Further tests have concluded that using a TMA channel to mimic this 3 % rule gave better results.

Here is a screenshot with a TMA channel (default TMA value in Blast):

TMA HalfLength 61, TMA price Close, ATR Period 100, ATR Multiplier 3

3P2.png

If you have already used TMA you know that its calculation repaints a few bars, and so we cannot rely on past information’s, but it gives a good picture of those 3 % levels in real time.

This TMA channel also gives a good idea of the current cycle of the instrument.

The Fair Market Price can also be named the wholesale rate. if you were going to buy, you always want the wholesale rate or better, so that means you need to be at Fair Market Price or lower to buy. If you are going to sell you want the price to be over inflated or Over bought.

In other words, Fair Market means the Currency price is Market Neutral, everybody agrees: Banks, Hedge funds and countries.

So, on the 1 hour chart, when you look at accumulations at the 3 % levels, you might find some trading opportunities, considering that you would need further confirmations to enter a trade (candle pattern formation, breakout…).

Please always keep in mind that price might move further, it is not an exact science.

Even if I have never found any documentation about this 3 % rule, I think this idea is worth further investigations.

3P3.png

[ScarletPip]

Interesting to know about the 3% rule. I have a strategy that uses the generic envelope indicator that comes with MT4 that uses a similar principle. Buy if price is above the envelope, sell if it is below, exit when price crosses back into the envelope and when it is inside the envelope, trade the trend reversals. I will post it soon.

Maybe TMA is superior to the simple envelope indicator. What I find is that the standard deviation size is crucial to success with that system. If the envelope is too wide you will not trade or catch only the peak/range as price reverts to the mean. If it is too narrow, you will lose your gains as you ride price back to the entry point. The difference between USDZAR and EURUSD for example is more than 2 std dev!

[Geko]

Interesting to know about the 3% rule. I have a strategy that uses the generic envelope indicator that comes with MT4 that uses a similar principle. Buy if price is above the envelope, sell if it is below, exit when price crosses back into the envelope and when it is inside the envelope, trade the trend reversals. I will post it soon.

I am always happy to hear about new ideas and system, you are more than welcome to post this idea

Maybe TMA is superior to the simple envelope indicator. What I find is that the standard deviation size is crucial to success with that system. If the envelope is too wide you will not trade or catch only the peak/range as price reverts to the mean. If it is too narrow, you will lose your gains as you ride price back to the entry point. The difference between USDZAR and EURUSD for example is more than 2 std dev!

I think that TMA would fit more easily to the various instruments as it is using the ADR to calculate the channel. Anyway, let’s see your approach with the envelope, I am sure it would be easily duplicable to TMA.



Concerning the 3 % rule, I was honest in the first post, I never found any documentation about it, but it makes sense somewhere. If there wasn’t any kind of regulation (even induced), we would see some crazy moves on the various pairs. Don’t get me wrong, we have some crazy moves, but it could worst. There are plenty of speculators and investors on the forex market but there are also plenty of professionals who are using forex to cover and freeze their risks (risk of change) with various mechanism (I think at farmers, oil companies, aircraft manufacturer…). So, having a kind of induced regulation is not that crazy (one can check this idea by looking at delta from 1 week to the other).

[jen.cormick]

TMA – 3 % Rule reversion

In this post, I am going to share with you one method which could be used to detect when price has moved significantly away from its mean and to trade the reversal to the mean.

This method could be called OOM (Out Of Market).

According to some guys, there is a kind of induce rule from the IMF (International Monetary Fund), the 3 % rule.

When price has moved more than 3 % from its Fair Market price (mean price), Market Makers have 24 hours to bring price back inside this range (into compliance) or the IMF will intervene.

This Fair Market price could be estimated with a Moving Average with the following settings:

FM MA: TF H1, Period 61, Shift 0, Method Linear Weighted, Price Close

Here is a screenshot showing the levels, in red upper and lower Extreme at a 3 % shift:

3P1.png
This was the main idea, the MA could be changed for a 56 or 54.

Further tests have concluded that using a TMA channel to mimic this 3 % rule gave better results.

Here is a screenshot with a TMA channel (default TMA value in Blast):

TMA HalfLength 61, TMA price Close, ATR Period 100, ATR Multiplier 3

3P2.png
If you have already used TMA you know that its calculation repaints a few bars, and so we cannot rely on past information’s, but it gives a good picture of those 3 % levels in real time.

This TMA channel also gives a good idea of the current cycle of the instrument.

The Fair Market Price can also be named the wholesale rate. if you were going to buy, you always want the wholesale rate or better, so that means you need to be at Fair Market Price or lower to buy. If you are going to sell you want the price to be over inflated or Over bought.

In other words, Fair Market means the Currency price is Market Neutral, everybody agrees: Banks, Hedge funds and countries.

So, on the 1 hour chart, when you look at accumulations at the 3 % levels, you might find some trading opportunities, considering that you would need further confirmations to enter a trade (candle pattern formation, breakout…).

Please always keep in mind that price might move further, it is not an exact science.

Even if I have never found any documentation about this 3 % rule, I think this idea is worth further investigations.

3P3.png

Thanks Geko for an interesting analysis.

1. If we use the TMA , there is no need to incorporate this moving average
FM MA: TF H1, Period 61, Shift 0, Method Linear Weighted, Price Close
Is this correct?

2. I have downloaded the GIG-Blast and let me know if i have got the settings right.

Settings-TMA.png

3. The TMA channel, is the Top Yellow Line the 3% limit or the Red Cloudy thing the 3% limit?

TMA-3 Percent Rule.png

4. We are talking about 3% deviation, but if the middle line represents the fair value, shouldn't 3% deviation be really far away, much further from the top/bottom yellow lines/cloud thingy?

Thanks

PS: You are really passionate about trading. Kudos for trading,coding and maintaining a website as well