Gold Mean Reversion

Trend following buys strength expecting continuation. Mean reversion buys weakness (oversold) expecting a bounce. They're opposite approaches suited to different market conditions.

Standard is RSI(14) with 30/70 levels. For more signals, use RSI(7) or 35/65 levels. For fewer, higher quality signals, use RSI(21) or 25/75 levels. Test what works best for your timeframe.

Most likely you're fighting a strong trend. Check ADX - if above 25-30, the market is trending and mean reversion often fails. Only use mean reversion in ranging markets (ADX < 20-25).

Not recommended. Wait for RSI to turn up (cross back above 30) or for a reversal candle. This confirms the extreme is exhausting and reversion is beginning.

Depends on timeframe. On 4H charts, typically 2-5 days. On daily charts, 1-2 weeks. On intraday, hours. Set time-based exits if reversion doesn't occur in reasonable time.

Band walk: Price rides along one Bollinger Band for 3+ consecutive bars, often with strong momentum. The bands typically expand. Don't fade these - wait for price to close back inside bands with exhaustion signal.

No. In high volatility (ATR elevated), use wider bands (2.5 std) and wider stops. In low volatility, tighter bands (1.5 std) and tighter stops. Adjust to current conditions.

In uptrends: Only take oversold buy signals (buy the dip). In downtrends: Only take overbought sell signals (sell the rally). In ranges: Both directions valid. This aligns mean reversion with trend.

Options: (1) Accept stop-loss if hit, (2) Have predetermined scale-in levels (add at RSI 25, add at RSI 20), (3) Wait for extreme to deepen before entry. Never add without a plan.

If position isn't profitable after N bars (e.g., 10 bars on your timeframe), consider exiting. The setup may have failed. Calculate based on typical half-life of reversion for your instrument.

Z = (Current Price - 20 SMA) / Standard Deviation of prices over 20 periods. Entry at Z > |2|, target at Z = 0, stop at Z > |3|. This standardizes signals across price levels.

Gold and USD are inversely correlated. For long gold mean reversion, ideal setup is gold oversold + DXY overbought (both likely to revert). Divergent setups (gold oversold but DXY also oversold) are weaker.

This requires backtesting on your specific timeframe. Common starting points: RSI(14) 30/70, BB(20,2). Test variations and use walk-forward analysis to find robust parameters.

Gold is a safe haven. During risk-off (high VIX, crisis), gold may stay elevated. Be cautious shorting overbought gold. Conversely, oversold gold during risk-off may bounce sharply - good long opportunity.

Core signals (RSI, BB extremes) are easily automated. Add trend filter (ADX) to avoid trending markets. Hardest to automate: Recognizing fundamental events that override technicals. Semi-automated works well.