0:03 Hey, hey. What's up, my friend? So, in
0:06 today's video, you will learn a mean
0:08 reversion trading system that has
0:11 generated 2,834%
0:15 over the last 25 years. So, to put
0:17 things into perspective, that's about a
0:20 14% annual return with a maximum draw
0:22 down of 27%.
0:25 And by the way, the S&P 500, if you buy
0:27 and hold it for the last 25 years,
0:29 you're looking at about 8 to 10% returns
0:32 a year with a maximum draw down of 55 or
0:34 even 60%. So you can see that this
0:36 system has a higher return and lower
0:38 risk compared to a buy and hold approach
0:40 on the S&P 500. And the best part is
0:42 that this trading system has close to a
0:44 70% winning rate. So it's going to be
0:46 easier on your trading psychology
0:48 because out of 100 trades that you put
0:51 on about 70 close to 70 is going to be a
0:54 winner. So if you're interested then
0:56 today's training is for you because I'll
0:58 explain to you what is mean reversion
1:00 trading the exact trading rules of this
1:02 system. The entry the exit the risk
1:04 management and much more sounds good
1:07 then let's get to it. So what is mean
1:08 reversion trading? So I want to make
1:09 sure that we are all on the same page
1:11 over here. So mean reversion trading is
1:14 when stock price deviate from their
1:17 average price because when they do they
1:20 usually revert back to the mean. I'll
1:23 show you shortly, right? What this looks
1:25 like on the chart and as a mean
1:26 reversion trader, you look to profit
1:29 from this snapback. So imagine this.
1:30 Imagine there's a rubber band, an
1:33 invisible rubber band in my hands. When
1:37 I pull that rubber band and I let it go,
1:40 what happens? The rubber band
1:42 snaps back. So, it's the same thing for
1:44 stock trading. So, as a mean reversion
1:46 trader, what you're trying to do is
1:48 this. You're identifying, in fact, let
1:50 me just move on to the concept first.
1:52 You're looking to identify stocks that
1:55 are in an uptrend, something like this.
1:58 And then you wait for a pullback and you
2:00 buy on the pullback. You're not waiting
2:02 for confirmation reversal pattern or
2:04 whatsoever. As a mean reversion trader,
2:07 mean reversion stock trader, you are
2:09 trying to catch the falling knife. Okay,
2:11 you buy on a pullback, buy when the
2:13 market looks bearish and when the market
2:16 makes a bounce, okay, you sell thereby
2:18 capturing this bounce, this quick profit
2:21 over here. So this is the goal of a mean
2:23 reversion trader, someone trading in the
2:25 stock market. And of course, this
2:27 concepts that I've shared with you, the
2:30 idea it is not enough, right, to develop
2:32 into a trading system because a trading
2:34 system must have a fixed set of rules.
2:35 When exactly do you buy, when do you
2:37 sell, how much to buy and sell and stuff
2:39 like that. And this is where we move on into
2:41 into
2:42 the trading system itself. So earlier
2:44 the min reversion the concept is more of
2:46 a highle strategy. So now we're moving
2:48 into the system with exact trading
2:50 groups. So we're going to be trading
2:52 stocks in the Russell 1000 index pretty
2:55 much the largest 1000 stocks in US. So
2:57 you can easily enter your trades and
3:00 exit them with minimal slippages. Time
3:02 frame is a daily time frame. And risk
3:05 management 20% of your capital for each
3:07 stock and a maximum of five positions. I
3:08 want to explain this one a little bit
3:10 because I think many traders watching
3:12 this might be thinking, "Man, Rene, what
3:15 does it mean?" Let me explain. So,
3:18 imagine you have $10,000 trading
3:20 capital. What this means is that you can
3:23 hold a maximum of five stocks
3:26 and each stock you will buy $2,000 worth
3:30 of stocks. So, 2,00 2,000 2,000 2,000
3:32 2,000
3:36 2,000. Okay? And if you buy five stocks,
3:38 you will realize that all your capital
3:40 will be used up. So there's no leverage
3:42 involved. So let's say for example,
3:45 stock, let's call it stock A. There's a
3:46 valid trading setup and you want to buy.
3:48 How much stock A do you want to buy?
3:50 Well, you buy $2,000 worth of stock A
3:52 because that's the maximum amount of
3:54 dollar value you can assign to one
3:56 stock. Make sense? Now, let's have a
3:58 look at the trading rules of this
4:01 system. So number one, the stock is
4:03 above the 200 day moving average. So
4:07 this is the criteria to define
4:09 an uptrend. It's kind of like, you know,
4:11 you want to make love to your wife. You
4:12 want to pop the question, you want to
4:14 hint to her when she's in a good mood.
4:16 Same for stock trading. When you want to
4:17 buy stocks, especially if you want to
4:19 make money on the long side, you want to
4:20 make sure that the overall market, the
4:23 overall stock is in an uptrend. So the
4:24 way we do it is that the stock must be
4:27 above the 200 day moving average. Next
4:29 one, second rule. And by the way, some
4:30 of you are, you like to ask me, Raina,
4:32 should I use the simple moving average,
4:35 the weighter, the exponential?
4:37 My answer is this. It doesn't matter. It
4:39 doesn't matter whether you're going with
4:41 the SMA, the EMA, the WMA, the MMA,
4:44 whatever, because the concept is what
4:46 matters. If you think about this, the
4:49 difference between the 200 SMA, EMA,
4:51 whatever MA, the value is going to be
4:53 very minimal. Okay, maybe one could be
4:56 let's say a value of 200 for the SMA.
4:59 Then the EMA the value could be 200.5 or
5:01 201. It doesn't really going to change
5:03 much. So really the concept is what
5:05 matters. And I would be worried or you
5:06 should be worried if someone tells you
5:08 that it makes a big difference because
5:09 if it does makes a big difference it
5:11 clearly the trading rules are
5:14 overoptimized and the strategy the
5:15 system will likely not work in the real
5:17 world of trading. So whether you go with
5:18 200 day simple moving average or
5:21 whatsoever it is not important. What's
5:23 important is the concept behind it which
5:26 is pretty much one thing to define
5:27 stocks that are in an uptrend. There are
5:29 many ways to go about it and in this
5:30 case I just simply use the 200 day
5:33 simple moving average.
5:35 Next one the stock closes below the
5:36 lower ballinger band. So this is the way
5:39 to define the pullback and again it's
5:41 not the only way you can use RSI
5:44 stoastic or whatsoever. But in this
5:46 example for this system I use the binger band.
5:48 band.
5:50 When that happens, you then place a 3%
5:53 buy limit order
5:56 for the stock. So this is to help us
5:58 define stocks that are oversold. And the
6:00 3% buy limit order is based on the
6:03 previous day closing price. Okay, just
6:05 to be clear over here. So number four,
6:08 if your order is filled,
6:10 you sell when the 2-day RSI crosses
6:11 above 50 or after 10 trading days. So
6:14 this is the criteria to exit your trade.
6:16 So most of the time you will exit when
6:18 the 2-day RSI crosses above 50. I would
6:23 say 80 to 90% of the time you will exit
6:25 through this mechanism. But there are
6:28 times right when you capture a falling
6:29 knife and a stock price just goes down
6:33 day after day like diary and it doesn't
6:34 even even make a bounce. So this is
6:36 where we want to have a timebased stop
6:39 loss to cut our loss after 10 trading
6:42 days. a maximum of 10 trading days and
6:46 this criteria will be used if this
6:47 doesn't happen. So there are times right
6:50 where stock price just diary you still
6:52 have to hold that stock for 10 trading
6:56 days and then sell it right if the 2-day
6:57 RSI has not crossed above 50 within the
6:59 10 days. And finally if there are too
7:01 many stocks to choose from select the
7:02 ones that have increased the most in
7:05 price over the last 150 days. So because
7:06 you're trading stocks in the Russell
7:09 1000, there's a thousand stocks that
7:11 that that you can trade. So sometimes
7:13 there are many opportunities lined up
7:15 for you. What happens is that you'll be
7:16 spoiled for choice like a buffet. Oh,
7:20 which one do I pick? So this is where
7:21 the ranking system comes into play. You
7:23 want to select stocks that has increased
7:25 the most in price over the last 150 days
7:28 because these are stocks that
7:29 are the strongest. That's why they went
7:31 up the most in price over the last 150
7:33 days. And these are the stocks that are
7:35 likely to continue higher. So that's our
7:39 ranking system. And finally,
7:41 the Ballinger bands. We tweak the
7:42 settings a little bit. We use 2.5
7:44 standard deviation instead of the
7:46 regular two standard deviation for most
7:48 uh charting platforms. When you insert
7:49 Ballinger band, it's usually 20-day
7:50 moving average and two standard
7:53 deviation. For this one, we go with 2.5
7:55 standard deviation. So in this in this
7:57 case right we are looking for the stock
8:01 to be or rather to define it to be more
8:03 oversold in that aspect. Now let's have
8:06 a look at an example so you can see how
8:08 this trading rules look like and also
8:11 how to add the indicators and adjust it
8:14 on your trading view platform. So I'm
8:18 using the replay mode. Let me just see.
8:21 Okay, looks better now. So, first thing
8:23 first, we need to make sure that the
8:24 stock price is above the 200 day moving
8:26 average. So, you look for SMA. Just
8:29 click on this. I'm just going to change
8:31 this to 200
8:35 style. I like it black because that's
8:38 how I define my 200 day moving average.
8:39 So, we can see the stock price is above
8:41 the 200 day moving average. Our first
8:42 criteria is met. In fact, if you need a
8:44 refresher because you have a memory of a
8:46 goldfish like me, number one, the stock
8:47 price is above the 200 day moving
8:49 average. Number two, the stock closes
8:51 below the lower Ballinger band. So, next
8:53 thing we need is the Ballinger band. So,
8:54 look for Ballinger band. And if you
8:57 recall the Ballinger bands that we use,
8:59 we tweak the settings slightly. We go
9:02 with 2.5 standard deviation. So, you can
9:03 see over here original settings was two.
9:06 So, I'm changing changing it to 2.5.
9:11 Okay. And then you re you would remember
9:13 that it has to be close below the lower
9:16 Ballinger band. So over here you can see
9:18 over here the stock price did close
9:20 below the lower Ballinger band. So what
9:23 we need to do now is to place a 3% buy
9:25 limit order to see if we get filled on
9:27 the trade. So what we need to do is to
9:28 find out what is the closing price on
9:31 this for this candle here and then just
9:34 multiply it by 0.97. So I went to get my
9:36 calculator. So you can see the closing
9:39 price is 27.71.
9:42 You're going to multiply by 0.97
9:45 and you get 27.71
9:48 multiply by.97 26.87.
9:50 26.87.
9:52 Okay. And what I'm going to do is just
9:54 going to illustrate on the chart where
9:56 is 26.87. I'll use this green line over
9:59 here. Boom. Oh, it's red. Let me just
10:01 change this to green to signal our
10:04 entry. And according is 26.87.
10:07 Okay. So what's going to happen is that
10:10 if the next day the stock price falls to
10:11 this green line, we would have gotten
10:12 filled on the trade because we are
10:15 placing a buy limit order with your
10:18 brokerage account. So you can see over
10:21 here, boom, next day the market
10:23 gap down lower and obviously we're going
10:25 to get filled depending on what price
10:28 you might get filled at a lower price
10:30 compared to the limit order that you've
10:31 gotten filled as well. So anyway, you
10:33 will you will be filled on this trade.
10:34 So now next thing to remember is what's
10:38 the exit? Exit is when the two-day RSI
10:41 crosses above 50 of the 10 trading days.
10:43 So the next indicator that you will need
10:46 is clearly the RSI indicator
10:48 relative strength index. I'm just going
10:49 to change the settings so you can see
10:52 how I do it. The length is two period.
10:54 We don't need the moving average one. So
10:56 just going to remove this and click
10:57 okay. So at this point you can see that
11:02 the RSI value it's actually 0.95. We're
11:04 looking for it to be above 50. So let's
11:10 see if it goes up higher or not.
11:13 Still below right right now it's 15
11:17 13. Boom. 71. You can see. So now the 2D
11:19 RSI is above 50. This is where we're
11:21 going to exit this position possibly for
11:23 for a loss.
11:26 So now as you can imagine this right the
11:29 RSI value is only confirmed
11:31 this is only confirmed when the market
11:32 close. So of course you can't exit your
11:33 trades when the markets are closed.
11:35 Well, you can trade after market hours,
11:37 but usually you get very poor feels. So
11:39 what we're going to do is we only exit
11:41 this trade then at the next day when the
11:44 market opens. Boom. So it opens over here
11:46 here
11:47 right at this price point. In fact, if
11:50 you want, I can just use this tool over
11:56 Okay. And this is our exit. So we can
11:59 see over here we bought at this green
12:01 one and we sell at this red level. And
12:03 clearly this is going to be a losing
12:06 trade. But the purpose of this chart is
12:08 not to show you winners or let you
12:09 think, oh man, this is the holy grail.
12:10 You're going to win all the time. No,
12:12 it's just to kind of like show you how
12:14 the trading setup works, where we enter,
12:15 where we sell, and whatnot. And of
12:17 course, one trade doesn't mean a thing
12:19 because it could just it's just random
12:20 luck, right, in the short term. So this
12:23 is why when you have a set of rules when
12:25 you have a fixed trading system you can
12:28 run a back test on it and see how this
12:29 system has performed over the last you
12:31 know in this case 20 over years. Let's
12:33 have a look. Okay so you can see over
12:34 here this is the equity curve of this
12:38 trading system over the last 25 years up
12:43 about 20 2834% over the last 25 years.
12:45 Breaking, breaking this down further,
12:48 you can see the month- on-mon year
12:50 results. Like in 2000, January is up
12:55 12%. For the year is up 97%. 2024, the
12:57 system made 29%. We have a few losing
13:00 years like here, here, here, here. So,
13:03 four losing years over the last 25
13:06 years. Not too shabby. And for the
13:07 detailed breakdown, you can see over here
13:09 here
13:13 2,834% since 2000. So annual return is
13:17 about 14% a year. 66% winning rate, 33%
13:19 losing rate. Payoff ratio, this is
13:21 important. So let me explain. So how we
13:23 define payoff ratio is that we take our
13:25 average profit divide by our average
13:26 loss. And we you will realize that for
13:28 this system your payoff ratio is less
13:31 than one. So what this means is that on
13:35 average your losses are larger than your
13:37 winners. And you might be thinking so if
13:39 that's the case then how are we still
13:41 how is this system still profitable?
13:42 Well, the reason why this system still
13:43 makes money in the long run, despite
13:46 having the average size of their losses
13:47 being bigger than the winners, is
13:50 because of this, your relatively high
13:52 winning rate. You're winning about 66%
13:55 of the time. So, you can see that you're winning
13:56 winning
13:59 twice as often compared to losing,
14:01 right? You you lose 33% of the time and
14:04 you win 66% of the time. And maximum
14:05 draw down is 27%. So, what does this
14:07 mean? So, let me explain. This is again
14:08 very important, especially when you're
14:10 trading strategy systems or whatsoever.
14:11 You want to know what's the maximum draw
14:13 down of the system that you are
14:15 potentially trading. So let's say if you
14:18 have $100,000 trading capital and let's
14:20 say over the last 10 years the worst
14:22 your capital went down to was let's say
14:24 $50,000 and then eventually went back up
14:28 higher to let's say $200,000. So from
14:31 100,000 down to 50,000 we call this a
14:33 50% draw down. That's the maximum draw
14:36 down that you have experienced trading
14:38 this let's say this system right over
14:40 the last x number of years. So from the
14:42 peak to the tri we want to measure how
14:44 deep is that decline in terms of
14:46 percentages. So the deepest the maximum
14:48 decline we call that the maximum draw
14:51 down and for this system is 27%. And to
14:53 put things in perspective if you buy and
14:56 hold the S&P 500 let's say from 2000 to
14:58 right now today I believe your maximum
15:01 draw down for the S&P 500 is 55 or 60%
15:02 thereabouts. So this is to kind of kind
15:05 kind of like give you an idea of what's
15:08 the maximum draw down for a buy and hold
15:12 investor in the stock markets.
15:15 And moving on the pros and cons let's
15:16 talk about the pros and cons of mean
15:18 reversion trading because no trading
15:21 system is is perfect. So I just want to
15:22 let you know what are some of the
15:24 advantages and disadvantages that you
15:25 will experience. Number one, you have a
15:26 relatively high winning rate, right?
15:29 Mean reversion trading systems. I
15:31 generally see it, you know, above 60%
15:33 winning rate. Some even as close as 70%
15:37 is doable as well. This type of trading
15:39 strategy you usually do well when the
15:41 stock market is ranging or in a choppy
15:42 bullish market because if you imagine
15:45 this, if the market is bearish, you are
15:47 not going to get too many stocks to
15:48 trade because most of them are going to
15:50 be below the 200 day moving average in a
15:51 downtrend. So, you won't have too many
15:53 trading opportunities. At the same time,
15:54 if the market is very bullish going
15:56 parabolic, you also won't have too many
15:58 opportunities because there isn't a
16:00 pullback that you can buy into because
16:02 remember this trading systems, you buy
16:03 on a pullback. So, if the market is very
16:05 strong going parabolic, again, this
16:07 system is likely to underperform. So,
16:10 usually it does well in a choppy or
16:12 bullish but still choppy bullish market,
16:14 this system tends to do well. The
16:16 downside is you get the less than one
16:17 to1 risk-reward ratio because you've
16:19 seen earlier the average loss is
16:20 slightly bigger than your average
16:23 profit. And finally, you would tend to
16:25 give back profits in a bare market or
16:26 rather I would phrase it, you would tend
16:29 to not do so well in a bar in a bare
16:32 market. And give back profits in a bare
16:34 market meaning that sometimes you could
16:36 buy the stocks and then the market goes
16:39 into a sudden fear, right? It drops like
16:40 10%, 20% like for example the recent
16:42 tariffs, right? So a number of your
16:44 positions right are going to get hit
16:48 when such a sudden decline in the stock
16:51 market happens. So you tend to give back
16:52 profits or you'll see your account go
16:55 into a draw down during this period. And
16:56 of course it doesn't go down forever
16:58 because if you recall we have a trend
17:00 filter for the stocks. The stocks must
17:01 must be above the 200 day moving
17:04 average. So if the overall stock is in a
17:07 bare market going down 20 30 40% by then
17:09 you're probably in cash already. And for
17:11 systems like this you'll remain in cash
17:12 till things reverse and then you start
17:14 going back long to look for
17:17 opportunities again. Now, before you go,
17:21 I'd like you to get access to this free
17:22 training. You can get it at tradingwithra.com/go
17:24 tradingwithra.com/go
17:26 or in the description or in the comment
17:28 section below this video. So, in this
17:30 training, you will discover three
17:32 rule-based trading strategies that work
17:35 and they're all backed by data. In fact,
17:36 the strategy that you've just learned is
17:38 actually taken from this training. So,
17:40 you will learn, in other words, two more
17:42 extra trading strategies. And again,
17:45 I'll walk you through the
17:46 trading rules, the entries, the exits,
17:48 the risk management and chart examples
17:50 so you can quickly understand the
17:52 concepts of these strategies. And that's
17:54 not all because I would also like to
17:57 give you the PDF slides of this
18:00 training, the trading strategies cheat
18:02 sheets so you can quickly recap the
18:03 rules of this different trading system
18:05 and the back test report of all these
18:07 different trading systems. So you can
18:09 see the winning rate, the losing rate,
18:11 what is the payoff ratio, etc. all the
18:13 back test report given to you in this
18:16 training for free. So everything is free
18:17 over here. Just go down to tradingwithra.com/go
18:19 tradingwithra.com/go
18:21 or I'll put the link somewhere in the
18:22 description below or in the comment
18:24 section below. Just click on it. You'll
18:25 come to this page and you can get
18:27 started immediately. So with that said,
18:28 I wish you good luck, good trading. I
