ETF 3-Day Reversion Strategy

Introduction: This strategy is a modification of the “3-day Mean Reversion Strategy” from the book "High Probability ETF Trading" by Larry Connors and Cesar Alvarez. In the book, the authors discuss a high-probability ETF mean reversion strategy for a 1-day time-frame with these simple rules:

• The price must be above the 200 day SMA and below the 5 day SMA .
  
• The low of today must be lower than the low of yesterday (must be true for 3 consecutive days)
  
• The high of today must be lower than the high of yesterday (must be true for 3 consecutive days)
  
• If the 3 rules above are true, then buy on the close of the current day.
  
• Exit when the closing price crosses above the 5 day SMA .
  

In practice and in backtesting, I’ve found that the strategy consistently works better when using an EMA for the trend-line instead of an SMA . So, this script uses an EMA for the trend-line. I’ve also made the length of the exit EMA adjustable.

How it works:
The Strategy will buy when the buy conditions above are true. The strategy will sell when the closing price crosses over the Exit Moving Average

Plots:
Green line = Exit Moving Average (Default 5 Day EMA )
Blue line = 5 Day EMA (Used as Entry Criteria)

Disclaimer: Open-source scripts I publish in the community are largely meant to spark ideas that can be used as building blocks for part of a more robust trade management strategy. If you would like to implement a version of any script, I would recommend making significant additions/modifications to the strategy & risk management functions. If you don’t know how to program in Pine, then hire a Pine-coder. We can help!