This is an extract from the live room where I was asked about the market reversal alerts EA and the strategies it trades (mean reversion trading strategies) and whether they would work in a trend. Mean reversion trading relies on the market’s natural ebb and flow being fairly rhythmic in nature and as long as this condition exists you can certainly trade mean reversion strategies. When position trading in a trend, however, you will occasionally get squeezed, meaning the market moves strongly against you for a period of time. In this video, we look at how to get out of those situations and still come out with a small profit or very small loss.

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Video Transcript

John, do your mean reversion strategies work be equally profitable in very volatile or highly trending markets or do you change the market reversal ACA settings and even the strategies and if so in what way? So yeah, no, they all, mean reversion works in all market conditions. That’s the beauty of mean reversion. Yeah, so if something is trending, the very nature of a trend, market structure trend, is that you have pullbacks.

Yeah, this is your mean reversion. So mean reversion works in a range. Obviously, you just mean revert the highs and the lows. Mean reversion works in a trend. After the strong pushes, you mean revert the pullbacks. You never know how far the pullbacks are going to go. So this is why I target small ADR targets. So you’re always going to be within reach of an exit, basically. But yes, they’ll be less effective in a trend because you will have less opportunities. So if you look at that trend there on gold, for example. So in a very weak trend like this, you’re going to get opportunities in both directions. So you’ve got an opportunity to mean revert when we push, you mean revert the pullback. There’s also an opportunity to mean revert the pullback into the next leg up. Then you can mean revert the pullback.

You can mean revert the pullback. You mean revert the pullback, you mean reverts there. So you’ve entered there, entered there, exited there. This is kind of an embedded, so you’d have entered, entered, entered, exited. Yeah, and then you can enter again as we’re pushing back in the other direction. So in a trend, what you’re gonna miss out on is a lot of the opportunities here.

Yeah, so when we’re in a choppy market, which is doing things like that, it doesn’t have to be a range, it can be doing this and staying within a massive range with lots of smaller ranges inside of it. So you’ve run it, all mean reversion works. In a strong trending market, yeah, it’s much more difficult because you’re going to miss half the opportunities because you’re only ever going to be able to get into strong pullbacks, but that’s fine. So yeah, you can get in any direction. The whole idea of the bias scorecard here is to help you choose the direction. So at the moment, because the vast majority of the market is range bound, you can pretty much take everything within a certain respect. You don’t want to overexpose yourself too much if possible, obviously. Because when something does squeeze against you, obviously if you’re overexposed, it’s going to hurt X amount of times more than it would if you only had one on. But when we’ve got strong biases on instruments, which we haven’t had this year, because we’ve been increasing interest rates for the last year, basically, or last six months strongly.

You would normally have a strong bias in one direction or the other. Yeah, so the maximum bias we’ve got at the moment, we’ve got sevens and eights, this goes up to 14. So what you would normally do is you would pick directional bias using either the 24-72 daily moving averages to give you an idea on which direction you should be going, or using the buyer scorecard to only go long on those, only go short on those, and take these in both directions. So all you would do in the market reversal of that CA is in the settings you’ve got the trade direction there, both signals. So all you would do is, if it’s green, you’d say, just go long.

And if it’s red, just go short. So if we did get, let’s say, for example, we wanted to just go long, yeah, so we’re taking long signals only. If you get an RSI extension to the upside, it just won’t short it. Because what could happen is you just get an accumulation break or a flag break. And you never get an RSI extension to the downside, which means you just don’t get into those trades, you just miss them. So depending on the strength of the trend, yeah, the trend will either give you those pullbacks like that one, and that You just don’t get in.

You miss all of that because that was the last signal you got. And then you get another signal to go short here. And then you’ve got another one to go short there. And then the trend changed direction here. So you’ve got in, in, in, out. Now we flip long. And this is what I mean. You can use whatever you want to. For directional bias, it’s totally up to you. You can use COT, you could use the bias scorecard, you could use the 2472 moving averages, you can use the 200 MA, you could use I’m only going to get in at support resistance and forget all directional bias and say I am literally only getting it at highs and lows and I’m going to trade everything that way. There’s no right or wrong. You just get in and the whole methodology of position trading is you get in and you get out when you get an opportunity to get out.

As long as the market isn’t going parabolic, yeah, with no pullback whatsoever, you will have an exit. Occasionally you’ll get a squeeze, which is a parabolic move that literally, what it tends to be is this. This is a parabolic move here, yeah? So your entry was here on H4. You probably would have got out of that, was it 34?

No, it was 80, yeah, you would have got out. So you’d have got out of that one. But this one here, yeah, that would have been your entry, or if let’s say you’re doing H4, M15 strategy, or M5, whichever, doesn’t matter which of those you pick. However, you go in there, right? And this is kind of what I was talking about in the library this morning, that there’s a lot of people are new to this, haven’t experienced a squeeze around the corner, somewhere on something. And that will be caused because there is a fundamental shift in the fundamentals for that currency, which is what the buyer scorecard keeps track of. Unemployment, GDP, inflation, and interest rates. You have four key drivers for currency direction.

Then you’ve got your COP positioning, which is the futures market positioning, which shows you which way the big players are moving. And then you’ve got retail sentiment, which is the opposite. So that all goes into the buyer scorecard to give you an overall direction. So at this point on the US dollar Swiss, the Swiss franc will have massively weakened for some reason, or the US dollar would have massively strengthened for some reason, or those two things would have coincided at the same time within a week or so, meaning that this thing just had nowhere to go but up. Yeah, and at that point, you would get in, you would get in then, what we say, 4 to 69. So you’d get in maybe somewhere around there as a second entry, somewhere around there, somewhere around there, you’re still in it, can’t get out, exit.

Yeah, and that one you would have held from the 14th of April until the 23rd of May. So roughly six weeks, which is typically what a squeeze is. A squeeze will last somewhere between four to eight weeks. There’s nothing you can do about it, which is why spacing a position is so important. You get in with that many positions, you will make a loss on this trade. This will be a loss. You’ll find it very difficult to make a profit on this?

You can do. I mean, if saying that, if you’d have used, so let’s say we did 1, 2, 3, 4, 5, 6, 7. Yeah. So if you used a 1.3 multiplier on these, which is quite common but more aggressive, when you got to here, your average would have been somewhere around there. So that would have been a very big profit or an exit, but you would have had to scale out on the way.

You would have to take some of this off, take some of this off, take some of this off, take some of this off. As we’re going up, which keeps your average close, we’re waiting for that profit take move. So when the banks are scaling into these parabolic moves, and this is why they call it a squeeze, what they’re doing is they’re squeezing the shorts. That’s why you call it a short squeeze. You’ve heard the terminology. They’re squeezing everybody that’s shorting until everybody that’s shorting goes, holy crap, I can’t handle the pressure anymore.

And they pop and they go, screw it, I’m getting out. And then eventually they get to the point where there’s no one left to buy. When you’re doing buys, you’ve got to have someone selling on the other end. Gets to the point where everyone’s going, there’s no one selling this thing. And they go, all right, fine, now we’ll get out. And that’s what you’re waiting for. This is the profit take move. The banks have built up on this. That’s them exiting. And this is why you’ll hear me say, we’ll climb up the stairs, and you fall down the elevator shaft. And the elevator shaft move happens in one or two days. The run-up can happen in weeks. You’re waiting for that elevator shaft, but your job as a trader is to hold on to that squeeze as long as you possibly can.

But if you have to scale out and take a loss, you have to scale out and take a loss. This is why exposure is so important. I don’t know when this was, 6th of April. So if we look at the other pairs on US dollar around that time, actually let’s look at the Swiss franc. March, April, Euro Swiss, pushed up, Pound Swiss. Yeah, so you can see that this basically, all these other Swissies at the same time, 6th of April, all the other Swissies had a bit of a push, but you’ve always got two currencies involved.

This was the Pound Swiss. So the Pound was weak and the Swissy was weak. So what happened was the pound managed to make some gains against the Swiss franc, but the second that Swiss franc turned around and went, I’ve got a bit of strength, the pound collapsed. Yeah, so you get totally different moves happening on different pairs, dependent on their strength. And this is why this, why a scorecard is so useful. Yeah, this tells us what the strength is from a fundamental perspective and from a futures positioning perspective and from retail.

Because if you can identify whether something has got very little chance of ever squeezing and you just traded these instruments and nothing else, you’re hardly ever gonna get into a squeeze if ever. Because here, for example, the pound CAD, the pound hasn’t got enough strength to push and the Canadian dollar hasn’t got enough strength to push. So they’re both crap or they’re both strong together. Either way, neither of them has got an advantage. So you’re not going to find that there’s a massive move in one direction or the other that is sustained for any period of time. Yes, it will push and it will pull and it will push and it will pull. But as long as it pushes and pulls and we get into three or four positions, we’re out. We’re fine.

So in trends, you are gonna get stuck. Identifying a trend shift is the difficult bit. There’s another squeeze there on the New Zealand and the Swiss. Entry low, you’d have got in there, you’d have got in there, you’d have got in there. Depending on whether you’d scaled out of that and that, you may have got an exit there, but only for break even, and you would have had to take losses on those two. And this is why we build our bank, and we bank often. The whole purpose of this is not to go, hey, look, I’ve had an amazing month. It’s to build up a pot in case we get squeezed. We need this money. This has got to be used to negate these positions.

Yeah, as things squeeze against us, we take this off. Yeah, so if that pageant, for example, now I’m long on it. If pageant just keeps coming down and down and down and down, I’m gonna have to start getting out of this because I’m wrong. What do I need to get out of it? Money. So I’m gonna use some of this to cancel this out, which is why we keep this under control. This is the whole purpose of this dashboard is to show you where you need to pay attention.

There’s nowhere I need to pay attention at the moment. There’s nothing anywhere remotely close to me needing to pay attention to anything. US dollar CAD, half a percent. It’s not even a worry. I’ve got a profitable position on it. But if you have multiple pairs squeezing at the same time, or rather trending at the same time, you’re potentially going to have multiple squeezes sitting here. And that’s what that’s going to be used for. This is what this profit plus column is in the dash, which a lot of people don’t know about.

This shows you your excess profit. So in the dashboard, you set your profit target, profit target for the day. So for example, here it’s 500, which is half a percent. So what this is doing is this is showing me how much excess profit I’ve got above half a percent. So 0.5% a day times 20 is 10% return a month. Yeah, so happy to get 10% return a month on 100K account that returns $10,000. Very happy. So what this is saying is, if you carry on wanting to do this, at the moment, right now, you could close out $5,300 worth of problem childs in here and still be above your target.

Yeah, so that’s what this is for, is to show you how much excess money you’ve got available to do drawdown control with when you need it. But if you don’t need it, you don’t do it. As long as the market’s going up and down these are all going to all this is is basically unrealized profit. This is profit waiting to be turned green it’s red at the moment because it’s going against us but when it comes back against us and goes green we put it over here and we keep doing that until something gets parabolic then we deal with it but we don’t deal with it until it’s parabolic, because every parabolic move is extended and has a profit take.

So the question you have to ask yourself, and this is kind of what I was alluding to this morning when we were talking about, people that contact me in Telegram saying, they found a money printing machine. It’s only a money printing machine when it’s printing money. In the same way as the market is only going to work all the time for you when it’s doing this. If you’re a range trader, happy days. As soon as it does that and you’re a range trader, you’re stuffed.

So this move here, for example, I took a long scaled out, took another scale out. So this position here, you can see that, can’t you? Took two losses on it. So it closed out 30% of the trade, so whatever that was, let’s say it was a one. We closed out 30% right there, so that took us down to a 0.7. And then as it pushed down again to here, we took another 30% off of that, 0.7 times 30%, we took off another 2.1, which brings us down to 0.49. Yeah, so this original position that we had here, which was one contract, by the time price had got to here, we’d dropped that down to half of its original size.

And what that means is that this second position we took here only had to push up that far for us to close both of them in profit. And that’s position trading, isn’t it? Yeah, so all the time we get in these big trends, if as long as the trend is market structure based, yeah, which is what most trends are, yeah. Look at this, and this is the whole reason I have the 2472 on the chart. What a trend does is, this is a very good example of a good trend.

I’m just trying to find a decent one. There you go, that’s better. So what a trend does is it pushes down and it pulls back into the 24, pushes down, pulls back into the 2472, pushes down, pulls back to the 24, pushes down, pulls back into the 2472. Down, up, down, up, down, accumulation, down, up. So as long as this is happening, you are always gonna have an exit. If this happens for three months in a row, there’s something gone wrong with something very badly. Some currency somewhere has got a massive problem. Euro, US dollar, prime example. Yeah. This is 25th of May 2021.

Everybody else in the world is starting to recover from COVID. What’s Europe’s main economy? Tourism. What are we not doing? Going on holiday. Absolute collapse. Yeah, what’s happening in the US dollar? Showing no signs of recession and everything picking up, stock market doing all right, everything’s going hunky-dory, yeah?

So the Euro-US dollar is a prime example of a fundamental shift where we had an economy and a currency that had zero interest rates, unemployment through the roof, GDP collapsing, and inflation starting to rise. And there’s absolutely no combination the banks could possibly do in Europe to solve that problem. Whereas in the US, it was going the other way. That’s a fundamental shift you need to be aware of. If you were looking at the bias scorecard at that time, you would assume your US dollar is either a minus 12 or a minus 14.

And you should never be long in the thing. But look at it, starting from here. If you’d have got in on that, and you haven’t got out on that exit there, you would have got in again somewhere around here and you had an exit there. It pushed back down again, let’s say you took a long there, probably out, but you got out on that one. So let’s say you got in long there, if you didn’t get that exit there, you’ve entered again and again, got stuck in an accumulation, as it pushed up into there, you’d have exited all three of those positions for a profit.

So as long as a trend, even if it is a bad, squeezy trend that goes on for a good year or so in this case, as long as it has market structure, yeah, we can still exit our positions. But you’ll have to take a few little losses along the way. So to answer your question, I’ve lost it, that was a hell of a long winded answer, wasn’t it? But anyway, so to answer the question, yeah, it works in a trend.

You just will have less profit. You won’t make as much money. You can avoid those trending markets by picking instruments that have no fundamental bias against each other. So if they’re both longs or they’re both shorts, there is no way that one of them is going to push hard that way and that way. The only thing it’s going to do is do that. Those are the ones you want to pick.