75 Mean Reversion System uses the Relative Strength Index to gauge when a stock becomes oversold during an uptrend or overbought during a downtrend. It aims to make quick trades that last only for a few days. In that book, they suggest that adjusting the time period for the RSI indicator from its standard of 14 down to 4 will dramatically increase the edge of that step by forex system. Then, it signals a long position anytime a market in an uptrend has its RSI indicator drop below 25.
It exits that position when the RSI crosses above 55. For a downtrending market, the system enters a short position when the RSI rises above 75 and exits that position when the RSI drops below 45. There were a total of 786 trade signals on the long side that averaged a return of 1. The trades averaged a length of 6. On the short side, 383 trades were signaled. Those trades averaged a profit of 1.
Wondering if publishing the system would skew its performance, blogger Sanz Prophet tested the system from the beginning of 2009 through September 5, 2012 trading both long and short signals. His results showed that the system logged an annual return of 7. He also noted that the system produced winners on 73. The issue with this system is the same as every other mean reversion system, it leave you open to taking a crippling loss. In that respect, these mean reversion systems are actually quite similar to martingale systems. They almost always produce a profit, except when a black swan shows up. The RSI is eventually going to come back to the middle where you exit the trade, and usually it will do so rather quickly.