Floating Mean Reversal Equity Indicator

This indicator creates two equity curves of the last twenty long and last 20 short trades. It is based on the simple mean reversal theory of buying if the candle is a red candle and selling if the candle is a green candle and then closing the trade one candle later.

A weighted average of the equity curves is also plotted to assist with analysis.

Each equity curve gives us an indication of recent market conditions.

For example if looking for long trades:

• If the green equity curve is below zero then the last twenty trades would have resulted in an overall loss and this indicates that buying on dips has not worked well recently.
• If the green equity curve is rising or is above the green weighted average then this indicates that buying on dips has worked better than average recently.
• If the green equity curve is above the red equity curve then this shows that going long on dips has been working better than going short on rises recently.
• If the green equity curve crosses over the red equity curve it may be an indication that market direction is changing.

Obviously when looking for short trades apply the same rules to the red equity curve and red average.

As the simulated trades are only one candle long this indicator works better on longer time frames such as daily or weekly to give an overall feel of market sentimentality. When used on weekly time frames it can be used as an overall filter to decide whether you should be putting your trading efforts into going short or into going long or as an indicator of a changing market structure.

As the equity curves are based on the last 20 trades there is the usual expected lag that you inevitably get with this type of indicator.

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