Strategy and performance
Mean reversion
Trading on the expectation that a price stretched away from its average will return to it. Win rates are typically high and individual losses large, which is the mirror image of trend following.
GFN’s figure
A high win rate does not survive an unstopped loss against a GFN daily limit: one trade that runs $5,000 against you on a $100,000 1 Step account ends the day regardless of how the previous twenty went.
In detail
Mean reversion,explained
The risk profile is what makes mean reversion dangerous on a prop account: a long sequence of small wins builds confidence and position size just before the move that does not revert.
Because the losses are the outsized ones, a hard stop matters more here than in almost any other style. Without it, the strategy's worst trade is open-ended.
Related
Terms thatcome with it
Most rules only make sense next to the ones they interact with. These are the entries this one depends on.
Trend following
Entering in the direction of an established move and holding until it ends. Win rates are typically below half, and the result depends on a small number of large winners covering many small losses.
Averaging down
Adding to a losing position to improve the average entry price. It lowers the break-even level and raises the size of the loss if the position keeps moving against you.
Stop loss
A resting order that closes a losing position at a predetermined level. It is the mechanism that turns a risk-per-trade figure into an actual limit rather than an intention.
Win rate
The proportion of trades that finish profitable. On its own it says nothing useful - a 90% win rate with one outsized loss and a 35% win rate with large winners can produce the same result.
Profit factor
Gross profit divided by gross loss across a sample of trades. A profit factor above 1 means the strategy made money; below 1 means it lost, whatever the win rate suggests.
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