How to tilt your trading edge if your dominant style is mean reversion
"Grant me the serenity to cut the losers,The courage to ride the winners,And the wisdom to know the difference."
– The trader's serenity prayer
Mean reversion strategies have a negative skew with a mode on the profit side: short right and long left tails. The solution is to shorten the left tail and elongate the right one.
Mean reversion market participants are naturally gifted at short selling. They short on a high and cover at a low. They are also better equipped to deal with sideways markets. The main danger however is to ignore the regime. While it is tempting to short rich valuations, or overbought RSI, stocks on an uptrend will often continue on their ascending trajectory. For example, RSI will travel from 40 to 80 on bullish stocks, and 60 to 20 on bearish ones. Overbought and oversold conditions are usually signs of continuation.
The solution is...
