Testing Trend Versus Mean Reversion with Prior-Bar Breakouts

Summary

This short strategy uses the previous bar’s high and low as directional thresholds. It enters long when the current close exceeds the prior high and enters short when the close falls below the prior low. Because opposite entries reverse the position, the same simple rule can be applied repeatedly across a price series.

The stated purpose is to diagnose whether an instrument behaves more like a trend-following or mean-reverting market: an upward equity curve is interpreted as evidence for trend behavior, while a downward curve is interpreted as evidence for mean reversion. The document supplies the rule and its interpretation, but no instrument selection, test period, costs, risk controls, or empirical results. Equity-curve direction alone is therefore only a crude diagnostic; it can reflect market regime, sizing assumptions, and trading frictions rather than a stable property of the instrument.

Key ideas

• A close above the preceding bar’s high triggers a long entry.
• A close below the preceding bar’s low triggers a short entry and reverses direction.
• The strategy proposes reading the equity curve as a rough test of trend-following versus mean-reverting behavior.
• No transaction costs, risk controls, or test evidence are reported, limiting the strength of that diagnosis.

Tags

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