AUD/JPY - A Tale of Mean Reversions

CMC Markets

Trading based on mean reversion is a strategy that is often done at the wrong times and requires a goodly degree of courage even at the right times. Why the courage? Because you are selecting a turning point in the market and assuming that price is about to do an about-face. The other question that the trader faces is - when is the right time? What you are looking for is a time when price is in a long-term oscillation. This will be demonstrated when you see a long moving average travelling horizontally.

I think that you can see quite a good example here. I have added a horizontal line so that you can see the variation of the 200 day MA over recent history. I have also added the 12 period CCI oscillator which in my opinion is a particularly effective helper with this type of setup because it can give you a warning that an opportunity to fade a rally or a fall in the price may be pending.

In the case of the chart above I think that waiting for price to close within the +1.25 SD bands would be a good idea to help isolate the turning point with a higher degree of certainty. Even if your price target is set at the 200 day MA then you still have a good risk:reward profile with your stop placed above the previous peak.

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