The mean reversion trading strategy uses multi-timeframe analysis to enter positions at exhaustion points. The market moves naturally up and down many times, while major market participants enter positions and then take profit on them. This causes the waves we see playing out over and over again. Every time a major buyer enters the market they become a future seller, as to exit their position (with a profit or a loss) they have to sell the position they bought. We can measure the strength of buying and selling cycles or moves with a number of indicators. The RSI (relative strength index) however, is one of the most efficient at showing how strong a move has been.
This strategy utilizes the power of RSI to show us when the market has performed a long sustained move in one direction very recently and is best used on a higher time frame like the 4 hour or daily chart, but also works well on the hourly chart too. We will wait for the higher timeframe (H4 in this case) to get extended on the RSI into a buy or sell zone. You can use any level you choose, but the higher the level, the fewer signals you will get but the more accurate they will be. 70/30 is a commonly used level, but 80/20 gives incredibly accurate turning points, but they are not hit as often. Once the level is achieved on the HTF (higher time frame) we start monitoring the lower entry time frame for market reversal alerts and start to build a position as it shows signs of movement in the opposite direction.
Often these initial entries will be correct as the market reversal alert indicator is showing the first potential signs of weakness on the lower timeframe when the higher time frame is ready to pull back or reverse. If price continues to push, you can simply scale into the position gradually and wait for the exhaustion to end, and the profit take moves to commence, exiting all positions in profit.
To trade this strategy manually, you can use the Market Reversal Alerts Indicator and the standard RSI indicator.
To trade this strategy automatically, you can purchase the Market Reversal Alerts EA for MT4 on the marketplace.
Market Reversal Alerts EA Results For 1 Year with 99.9% accuracy tick data trading the M15 time frame using this strategy.
Set file available in this blog post on the MQL5 website.
