Ornstein-Uhlenbeck Mean Reversion

Entry Logic

• Long Entry: The price of an asset deviates below its long-term mean, as modeled by an Ornstein-Uhlenbeck (OU) process.
• Short Entry: The price of an asset deviates above its long-term mean, as modeled by an OU process.
• Confirmation: The model indicates a high probability of reversion.
• Timeframe: Varies.
• Location: At a statistically significant deviation from the mean.
• Market Condition: Mean-reverting.

Exit Logic

• Profit Target: The long-term mean of the OU process.
• Scaling Out: No.
• Trailing Stop: No.
• Signal Failure: Exit if the price continues to deviate.
• Opposite Signal: Not applicable.
• Time Expiration: Based on the parameters of the OU process.
• Momentum Loss: Exit if the reversion stalls.

Stop Loss Structure

• Hard Stop: A pre-defined maximum deviation.
• Soft Stop: If the parameters of the OU process change significantly.
• Max Dollar Loss: Varies.
• Max Percent Loss: 3%.
• Structural Stop: Not applicable.

Risk Management Framework

• Risk Per Trade: 1.5%.
• Daily Limit: Not applicable.
• Weekly Limit: 5%.
• Max Drawdown: 15%.
• R:R Requirement: 2:1.

Position Sizing Model

• Sizing Approach: Based on the parameters of the OU process (mean, volatility, and speed of reversion).
• Volatility Adjustment: Yes.
• Conviction Sizing: No.
• Scaling In: No.
• Scaling Out: No.

Trade Filtering

• Market Conditions: Only on assets that can be accurately modeled by an OU process.
• Setups: Based on the output of the OU model.
• Instruments: Pairs spreads, interest rates, volatility.
• Time Restrictions: None.
• Chop/News Avoidance: Yes.

Context Framework

• Trend Direction: Not applicable.
• VWAP Relationship: Not applicable.
• MA Relationship: Not applicable.
• Range Location: At an extreme of the asset's range.
• Higher TF Alignment: Not applicable.

Trade Management Rules

• Breakeven: No.
• Scale Out: No.
• Add Size: No.
• Fast vs Slow Moves: The speed of reversion is a parameter of the model.

Time Rules

• Optimal Window: Any.
• Times to Avoid: None.
• Session Notes: A very advanced quantitative strategy.

Setup Classification

• A+ Setup: A large deviation with a high speed of reversion.
• A Setup: A moderate deviation.
• B Setup: A small deviation or a slow speed of reversion.
• C Setup: The asset cannot be modeled by an OU process.

Market Selection Criteria

• Instruments: Assets that show strong mean-reverting tendencies.
• Volume: High.
• Volatility: Any.

Statistical Edge Metrics

• Win Rate: 60-70%.
• Avg Win: 2R.
• Avg Loss: 1R.
• Profit Factor: 2.1.
• Expectancy: +0.6R.

Failure Conditions

• Market Conditions: A change in the underlying dynamics of the asset that makes the OU model invalid.
• Specific Scenarios: A shift from a mean-reverting to a trending regime.

Psychological Rules

• Discipline: Requires a complete reliance on the mathematical model.

Advanced Components

• Regime Detection: The OU model itself is a form of regime detection.
• Filters: Use statistical tests to validate the model's assumptions.
• Correlation: Not applicable.
• MTF Alignment: Not applicable.

Location

• Strongest: In markets with a clear and stable mean-reverting structure.
• Weakest: In trending or unpredictable markets.