How to Identify the Mean in Different Markets

In reversion to mean (RTM) trading, the “mean” is our anchor—the level that prices tend to return to after extended moves. Having a clear, reliable mean makes all the difference in RTM, helping us spot reversion setups and manage trades effectively. But while the concept of the mean is simple, the right mean can vary based on market type, asset volatility, and trading style.

In our trading, we almost exclusively use the 34 EMA as our mean. Its stability makes it versatile across markets and timeframes. In this post, we’ll show you why the 34 EMA is our go-to and explore other moving averages that can also be effective depending on your goals.

Why Identifying the Mean Is Essential in RTM

What the Mean Represents in RTM:

The mean is the price level to which prices naturally revert after they deviate. In RTM trading, this average acts as a target, indicating where price is likely to move once an extreme deviation occurs. By consistently trading toward the mean, we can capitalize on predictable price behavior and reduce exposure to unexpected trends.

Why RTM Needs a Reliable Mean: In RTM trading, the mean serves as a reference point for entry and exit. An unreliable mean—one that reacts too quickly or too slowly—can lead to poorly timed trades and missed reversion opportunities. A reliable mean, on the other hand, keeps our trades grounded and gives us confidence in our entries and targets.

Our Preferred Mean: For most trades, we rely on the 34 EMA as our mean. It offers a stable, reliable average that captures the natural flow of prices across multiple timeframes. The 34 EMA gives us a clear point of reference for both entries (when price moves far from the EMA) and exits (when price returns to the EMA).

Using the 34 EMA as the Mean

Why the 34 EMA Works Well Across Markets: The 34 EMA is a balanced moving average that smooths price movements without being overly reactive. Unlike shorter-term MAs, which fluctuate with smaller moves, the 34 EMA stays consistent, offering a clear mean level. This stability makes it highly effective across assets, whether you’re trading stocks, forex, or commodities.

How We Apply the 34 EMA in RTM: In our trades, the 34 EMA serves as both a target and a baseline. When prices deviate significantly from the 34 EMA, it often signals that a reversion setup is forming. As price moves back toward the 34 EMA, we use it as a reversion target, knowing that it represents a reliable mean.

Example: On a 15-minute chart, if price is trading well above the 34 EMA, we interpret this as an overextended move and consider a short entry, aiming for a reversion back to the 34 EMA.

Alternative Means for Different Markets and Styles

While the 34 EMA works well for us, different moving averages can be effective depending on your trading style and the market you’re trading. Here are a few alternatives we consider when adjusting for different strategies:

10 EMA for Faster Reversions: For traders focused on shorter-term trades or scalps, the 10 EMA is highly responsive and captures quick price deviations. It’s effective on lower timeframes (like the 1-minute or 3-minute chart) for spotting fast reversion opportunities.

20 SMA for a Classic Mean in Stocks: The 20 Simple Moving Average (SMA) is widely used in stock trading, especially on daily charts. Many traders view it as a standard mean for identifying reversion points in equities, giving a stable yet responsive reference.

50 EMA for Slower Market Analysis: For those who prefer a more stable mean, the 50 EMA is a good choice. It’s a slower-moving average that smooths out price movement significantly, making it suitable for longer-term trades or assets with higher volatility.

Experimenting with Different MAs: Each market and asset has its own characteristics, and different MAs can capture these nuances better. While the 34 EMA is our primary choice, feel free to test different moving averages to see which one aligns best with your approach and your market of focus.

Identifying the Mean Across Different Markets

Stocks: In stocks, the 20 SMA and 34 EMA are often used on daily or weekly charts to identify reversion levels. Both moving averages provide strong mean references in equity markets, which tend to follow more stable trends.

Forex: In forex, we find that the 34 EMA and 50 EMA are especially effective, given the volatility and fast pace of currency pairs. On intraday charts like the 15-minute, the 34 EMA often serves as a solid reversion target for intraday moves, allowing us to capture quick reversion trades in the currency market.

Commodities: For commodities such as oil and gold, which can have strong trending moves, longer-term means like the 50 EMA or even the 100 EMA are useful. These slower MAs work well to capture larger price swings and provide a stable mean for assets that are sensitive to supply and demand changes.

Cryptocurrencies: Cryptos are highly volatile, so a responsive mean like the 10 EMA or 20 EMA on shorter timeframes (such as 1-hour or 4-hour charts) can help capture quick reversions. For swing trades, though, a 34 EMA on a higher timeframe (like the daily chart) provides a more stable mean.

Tips for Choosing the Right Mean for Your Strategy

Match the MA to Your Trade Length: Your trade duration can impact which MA works best. For shorter-term trades, faster MAs like the 10 EMA or 20 SMA may be more suitable, as they capture quicker reversion moves. For swing or long-term trades, slower MAs like the 34 EMA or 50 EMA often provide better reversion targets.

Consider Asset Volatility: Highly volatile assets, like cryptocurrencies, may benefit from more responsive means, as they experience frequent price swings. More stable assets, such as major stock indices, tend to align well with slower-moving averages.

Consistency in the Chosen Mean: Consistency is key when using moving averages in RTM. We recommend sticking with one mean per asset or strategy to develop familiarity with price behavior and avoid confusion. By using a consistent mean, you’ll be able to spot deviations more accurately and build confidence in your trades.

As You Can See

In RTM trading, the mean is our guidepost. For us, the 34 EMA is the perfect balance of stability and sensitivity, providing a dependable target across various markets. While we rely heavily on the 34 EMA, other moving averages like the 10 EMA, 20 SMA, and 50 EMA can also work well, depending on the asset, timeframe, and trading style.

Experiment with different moving averages to find the one that suits your strategy and market. Once you find a reliable mean, you’ll have a solid foundation for consistent RTM trading.

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