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Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,059 since Dec 2013
Thanks Given: 4,410
Thanks Received: 10,226
That's actually pretty typical in a mean reversion system. The further you are from the "mean" or "normal range" the greater the probability of a reversion, so the bigger the position you want to have on. The problem occurs in those rare times when it doesn't 'revert' as you have you biggest position on as it goes against you!
Hi
Thanks for the post. There is so much negative posts and so called "gurus" that tell you to never to add to a loser. For the most part they are right, I do my very best not to on an outright. But for spread trading and the only thing that have minimized the very big loses is that the fact the I insist on closing all, rain or sunshine, by 3 CST. Testing by hand, I have seen $300-500 daily loss ( based on micro size-max of 5). Not many, you just need to be ready mentally for them when they do happen.
K
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,059 since Dec 2013
Thanks Given: 4,410
Thanks Received: 10,226
Adding to losers is normally a bad idea and I actually wrote a heavily read post [B]Why you should add to winners and never add to losers[/B] a few years back. So why given that post do I think it's both common and okay to add to losers in a mean reversion strategy? Well that analysis assumed a constant probability of the market going up or down. If our hypothesis of a mean reverting price action is correct, this is not the case as the further we get from the mean, the greater the percentage chance that we revert. If I get bored tonite I might write a simulation to try and illustrate this.
Yes , if you are trading with someone like Think Or Swim (TOS) with $4000 it is close to impossible to trade spreads. TOS gives you the double Whammy on commissions and margin.
For example for the pair (MNQm21-MESm21) as of today the margin with Interactive Brokers is $741 (one pair) while with TOS it is $2970 . This is typical with TOS.
Interactive Brokers pair ordering portion of the platform works very well. The pair is reduced to a single number with it's own points and ticks. For example at this moment
the (MNQm21-MESm21) is at 1228.40 .
When its mean reversion we say "mean reversion" when its trend continuance, we say "trend continuance" but where is the mean reversion when the trend continuance is working and visa versa?
Coming, they can't be denied. Going, they can't be detained.
To this costs possibly add more slippage costs due to the normal slow TOS data delay and then pipeline and local client slow downs with the market hits an impulse.