Price Deviation Thresholds for Mean-Reversion and Momentum Signals

Summary

The document proposes an indicator that measures price extremes relative to a moving average. It calculates the largest high-side and low-side deviations from the average over a lookback window, then combines those extremes into a threshold using a divisor. Separate signals track current deviations above and below the average. The suggested interpretation is to take contrarian trades when price crosses an outer threshold, based on an assumption of reversion toward the mean; it also mentions scalping in the direction of the move at those levels.

The example code supplies default lookback, history, and divisor settings, but does not include trade management or empirical results. The mean-reversion premise is asserted rather than demonstrated, and the alternative trend-following interpretation leaves the signal use ambiguous. Thresholds based on historical extremes may also depend heavily on the chosen window and settings. The indicator is a basic idea for experimentation, not evidence of a profitable strategy.

Key ideas

• The indicator measures high-side and low-side price deviations from a moving average.\nHistorical extreme deviations are combined to set upper and lower thresholds.\nThe author proposes contrarian trades when price crosses a threshold.\nThe document also suggests trading in the direction of the move at threshold levels.\nNo backtest or evidence is provided to establish either interpretation's effectiveness.

Tags

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