1992issue C071-3
A flat moving average as a range regime switch
A trend-following rule that stands aside when no trend is apparent can treat that idle state as the first sign of a range. This article shows how a flat 35-day simple moving average of closes then becomes the center of a mean-reversion band, and how a failed rebound can stop and reverse the trade.
- An idle trend rule, already out of the market because no trend is apparent, can be treated as the first indication of a possible trading range.
- Flat behavior in a 35-day simple moving average of closes is a second indication, and that same lookback can define the range as a time window plus a price band.
- Mean-reversion entries stay inside the band. If price fails to rebound at an equidistant line below the 35-day average, the procedure can stop and reverse into a trend trade.
- A 35-day horizon can be too slow for ranges that do not persist, so a 10-day average is offered as a more proactive input that can also be encoded for a machine.
From an idle trend to a range reading
A trend-following procedure that stands aside when no trend is apparent can treat that idle trend state as the first indication of a possible trading range. The rule is already out of the market. The same condition that kept it from taking a trend trade is reused as the opening clue that price may be ranging.
Flat behavior in a 35-day simple moving average of closes is presented as a second indication that price is ranging rather than trending. The moving average is a simple average of closing prices over a fixed lookback, used as a trend reading when it slopes and as the center of a range when it flattens.
How the range is specified
A trading range can be specified jointly by a 35-day time window and the price band around that same 35-day average. Range-trading then buys near the low side and sells near the high side of that defined band while the defining average is flat, and stands aside or reverses if the band breaks.
When older prices sit near the level of newer prices and a high and low appear to have formed, a long entry can be framed as a return toward the high side of the 35-day average. Mean-reversion here is the signal rule that expects price to travel back toward the opposite side of the band after an excursion away from the average.
A shorter average beside the same band
A 35-day horizon can be too slow for ranges that do not persist, especially in futures. A 10-day average is offered as a more proactive input that can also be encoded for a machine.
A 10-day average can open a more timely range around both the 10-day and 35-day averages after a sharp down day pulls the shorter average lower. Editorial note: the shorter lookback is not a second strategy. It is a faster reading of the same range-trading and mean-reversion rules when the 35-day window lags.
When the envelope fails
An equidistant line below the 35-day average can mark a mean-reversion target. If price fails to rebound there, both averages can begin to fall and the procedure can stop and reverse into a trend trade. The stop-and-reverse is the exit that flips the position when a range breakout or a failed return to the band implies that a trend mode has resumed.
One annotated sequence starts a range at A, trades into the range at C, D, and E, stops out at F, and reverses into a trending mode at G.
All readings on this track · 11 readings
- 1991Constructing Wyckoff readiness tests at range edges
- 1992A flat moving average as a range regime switch
- 1992A range-reentry case study with a shared adverse-excursion stop
- 1993Congestion boxes, edge candles, and the opening hour
- 1998Moving-average cross, range mode, and stop-reversals
- 2003When range regimes favor swing procedures over trend holds
- 2007Dollar range in a data-dependent rate regime
- 2008Construct a range-trade hypothesis from a price channel
- 2010Mechanical range trading with a global account stop
- 2015A quiet gold ETF range as a three-layer classroom problem
- 2016Regime-matched rules instead of price forecasts