One strategy that traders may consider for forex trading is looking at how far the price tends to deviate from the mean before reverting back to the mean. This can be done on our Next Generation advanced trading platform by using a moving average convergence divergence (MACD) or Percentage Price Oscillator (PPO), then setting the Fast Length to 1 and the Slow Length to how many periods you would like averaged.
On the EUR/USD chart below, the PPO is used to show how the closing price (1 period) compares to the 21-day average price. The black trendlines mark common areas where the price reverted back toward the mean. There are notable exceptions where there were large price moves, and these also tended to reverse near similar levels on the PPO.
So, how could a strategy like this be used? Some traders may opt to enter a short position if the price rises above a common reversal level on the PPO, then drops below that level. A target could be placed at the mean (moving average, or 0 level, on indicator).
The profit target (the average) is constantly moving, so traders may opt to update it with the completion of every price bar. To manage risk, a stop-loss has been placed just above the recent swing high that occurred prior to entry. This helps to control the loss in the event that the price continues higher instead of going back to the mean.
The same concept applies to long trades when the price dips below the common reversal point on the PPO and then rallies back above that level. The horizontal line (reversal point) on the PPO or MACD will vary by asset, and traders may wish to place it at a spot where many reversals have occurred.