#4: Exit when the 10-period RSI crosses above 40 (or after 10 trading days) This means the earliest time you can enter a trade is on the next day’s open-which is what we’re doing here. If you want to know whether the RSI indicator has closed below 30, you’ll have to wait for the market to close. So by waiting for the 10-period RSI to be below 30, we can enter our trade at a “cheap price” and profit on the next upswing. When the 10-period RSI is below 30, it means there’s strong bearish momentum (over the last 10 days).īut as you know, in the long run, the stock market is in an uptrend. Next, we need to define the depth of the pullback and we can use the RSI (relative strength index) for it.

If the price is below, then it’s a bear market and we’ll remain in cash. If the price is above it, then we’ll conclude the market is in an uptrend.

Well, we can use the 200-day moving average as a trend filter. In other words, we only want to be buying when times are “good” and stay on the sidelines during bear market conditions. Now, even though the stock market is in a long-term uptrend, there are times when it’s in a bear market (or a recession). Let me explain… #1: The market is above the 200-day moving average Exit when the 10-period RSI crosses above 40 (or after 10 trading days).The market is above the 200-day moving average.I learned it through the works of Larry Connors and Cesar Alvarez.)

(Note: I didn’t come up with this trading strategy on my own. Now, let’s transform this idea into concrete rules which you can use to trade the markets. The idea behind mean reversion trading is to identify stock markets in an uptrend, buy the pullback, and sell the rally. Mean reversion trading strategy (the rules)

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