Directional Strategies · Futures Trading Guide
Mean reversion assumes a temporary departure from a reference level. It requires evidence and an exit rule for the times when the market is repricing permanently.
Define what the market should revert toward
Possible references include a session average, a modelled relationship or a stable range. State why that reference is relevant to the contract and holding period. A moving average changes as new prices arrive. A return toward a moving reference is not the same as a return to the price that existed when the trade began.
Measure distance consistently
Suppose a completed data window gives a reference of 100 and a standard deviation of two points. A current price of 96 is two standard deviations below that reference. This statistic does not assign a reliable probability of recovery unless the model’s assumptions are justified. Futures returns can have heavy tails and abrupt changes in volatility.
Give the hypothesis a failure condition
A fictional long enters at 96, aims for 99 and plans to exit at 94 if the idea fails. With a $10 multiplier, the planned gross target is $30 and the planned price loss is $20. Neither outcome is guaranteed. Adding another contract at 94 doubles quantity just when the original hypothesis has failed. Averaging down is a new risk decision, not a repair to the first trade.
Identify the regime before trusting the test
Supply disruptions, policy decisions and changing financing conditions can create lasting shifts. Review performance during both stable and trending periods, with all rules fixed before the evaluation sample. Specify a time exit when reversion does not occur. Compare results after spread, fees and missed fills because short target distances are particularly sensitive to trading friction.
Try it yourself
A reference is 80 and its measured standard deviation is four. What is the standardised distance of 74, and does it guarantee a rebound?
Show the worked answer
The distance is negative 1.5 standard deviations. It describes the modelled deviation and does not guarantee any rebound.
Further reading
- Fidelity: Average True Range
- CME Group: Support and resistance
- CME Group: Position and risk management
- Bailey and coauthors: The probability of backtest overfitting
Educational material. Prices, margins and strategy examples are hypothetical unless explicitly identified as contract specifications. They are not trade recommendations. Futures losses can exceed deposited collateral. Product terms and eligibility vary by venue and jurisdiction.
