Building Daily Mean-Reversion Signals with a Three-Window Stochastic Index

Summary

The Edge Index is presented as a way to rank mean-reversion candidates, including rebounds and closes below the lower Bollinger Band. It combines three stochastic readings, each measuring the close relative to the high-low range over a different lookback window. The shorter and middle readings are inverted, the longer reading is added, and the resulting raw value is smoothed using the current and prior observations.

The author intends the indicator for daily charts and reports that default settings do not work intraday. Initial tests suggest better behavior in bull markets, but no detailed performance statistics, parameter values, or benchmark comparisons are supplied. The proposed use is therefore a screening aid rather than a validated standalone strategy. Its apparent usefulness may depend on market regime, timeframe, and how users define and test the specific mean-reversion entries.

Key ideas

• The index combines stochastic position readings from three high-low lookback windows.
• It inverts the shorter and middle readings while retaining the longer reading in the composite.
• The raw composite is smoothed with a weighted blend of its current and previous values.
• The author intends the default configuration for daily charts and reports weak suitability for intraday use.
• Initial testing suggests stronger usefulness in bull markets, but the document provides no detailed performance evidence.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.