AUD/JPY – A Tale of Mean Reversions

Trading based on mean reversion is a strategy that is often done at the wrong times and requires a goodly degree of courage even at the right times. Why the courage? Because you are selecting a turning point in the market and assuming that price is about to do an about-face. The other question that the trader faces is – when is the right time? What you are looking for is a time when price is in a long-term oscillation. This will be demonstrated when you see a long moving average travelling horizontally.

I think that you can see quite a good example here. I have added a horizontal line so that you can see the variation of the 200 day MA over recent history. I have also added the 12 period CCI oscillator which in my opinion is a particularly effective helper with this type of setup because it can give you a warning that an opportunity to fade a rally or a fall in the price may be pending.

In the case of the chart above I think that waiting for price to close within the +1.25 SD bands would be a good idea to help isolate the turning point with a higher degree of certainty. Even if your price target is set at the 200 day MA then you still have a good risk:reward profile with your stop placed above the previous peak.

 

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4 Responses to AUD/JPY – A Tale of Mean Reversions

  1. Pingback: End of The Year Gold Price | CMC Markets Blog

  2. lance philips says:

    With interests rates on the card this week .any views on shorts with aud cad .and aud jpy regards lance

    • Hi Lance – can’t speak for David but am still short AUD/CAD – looking for a breach of the neckline around 1.0330 – an interest rate cut could be a catalyst – although think its a 50/50 call, and on balance favour no cut

    • David Land says:

      Hi Lance,

      despite the expectations for interest rates this week the AUD seems to be holding up well against the JPY at this stage.The AUDJPY failed to close within the bands mentioned on my last post so didn’t get to short trade territory on a daily basis at least. It still looks to be treading water for the most part. The 50 day MA is starting to trend higher at the moment which may change my view in coming weeks – at this stage though I am waiting for a confirmed signal.

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