If you follow the posts of Scott Phillips here on Armchair Trader, you’ll find that (in my highly subjective opinion) that he talks a lot of sense. I’m not a huge fan of indicators on charts and technnical analysis in general, as in my experience it is a somewhat flawed science that works in hindsight but rarely in real-time. The only thing we can rely on as traders is price, which most indicators use in some element anyway. So why not just use price?
A few days ago – 2 January to be precise – I got an email from Scott (you can get these yourself by signing up here) talking about a potential buy setup in Crude. I don’t trade Crude all that much – the occasional dabble – but I took a look at this and liked the way it looked. Here’s Scott’s email below and take note – I actually took the trade myself, as reported in the Forums here, albeit with a tiny position.
It’s a brand new year, and I sat down at the computer the last few days to look at charts while the markets have been closed.
I’m just not feeling 2019 so far. Having trouble summoning motivation, and I’ve been extremely unproductive.
Still… I thought I’d show you a very interesting mean reversion setup in Crude, and explain a bit about the nature of mean reversion.
Take a look at this mean reversion setup today in February Crude.
Couple of things.
Firstly, note the unsustainable high volatility (big candles) after a long period of trending price action. We know extremes of volatility are unsustainable, so the highest probability is for a choppy market after such a long period of being easy to trade.
The bigger candles at the end of the move are dumb money traders who were afraid to short early FINALLY feeling confident enough to get short. That doesn’t usually end well.
Secondly, it’s tempting to try and pick a bottom here and think this thing will reverse and start a whole new uptrend.
At any given time there are three possibilities. Trend continuation, trend reversal, and a transition to a trading range.
And as we all know after a period of easy to trade trending action the HIGHEST probability is a choppy, hard to trade bullshit period. So betting on a powerful new uptrend forming is a sucker bet. The best we can reasonably hope for is a decent trading range.
When we look at a chart with a big trend our RECENCY BIAS comes into play. We naturally assume that what comes next is similar to what just came before, so we drastically underestimate the probability of a trading range, and just assume that after downtrend comes uptrend.
The edge in this setup comes from betting that the market character is probably going to change, and that most traders are going to be caught out by it.
So how to play mean reversion? You ALWAYS use a target, never trail a stop. And you make that target a conservative, easy to hit target.
This particular setup has a long term win rate around 62% with a 1:1 target.
So, there we have it. A long setup with a target price at recent resistance.
Want to know where Crude is right now, 15 days later?