My Mean Reversion Trading Strategy

Every trader has experienced the pain of buying when the price is dropping but the price continues to fall. I used to be a proprietary trader and have been trading cryptocurrencies for 8 years. I will explain exactly how I trade reversals on the 1-minute timeframe and everything I think about to avoid “buying when the price is dropping but it ends up continuing to decline.” Lesson 1. The Two Main Trading Styles (Momentum and Mean Reversion)

When the price approaches a support/resistance level, I only have 3 possible decisions:

1. I bet that the price will BREAK this level (Momentum)
2. I bet that the price will REVERSE from this level (Mean Reversion)
3. I refuse to bet. I do not want to trade at this level. (Staying Flat) Many traders watch many videos on YouTube about “how you should always buy at support and sell at resistance,” but this is completely incorrect. Because price action constantly changes: sometimes Option 1 is best sometimes Option 2 is best and sometimes Option 3 is best. IT DEPENDS ON THE SITUATION. Mostly depends on what? The current market conditions. Let’s explore more details below ↓ Lesson 2. My Best/Worst Trading Conditions for Reversal Trading The market goes through accumulation and expansion phases.

Accumulation phase = Price fluctuates, gets stuck, and bounces between peaks/troughs. This is the OPTIMAL environment for reversal trading.

Expansion phase = Trend, price continuously moves in one direction. This is the WORST environment for reversal trading. ❗️NOTE: The best condition for breakout trading is the worst condition for reversal trading. The worst condition for breakout trading is the best condition for reversal trading. The more you understand a strategy, the better you understand its opposite. Lesson 3. How I Perform “Market Scanning” to Check if Conditions Are Suitable for Reversal + Setting Alerts Before considering the rules for executing (entry/stop-loss/take-profit), it’s more important to identify the optimal trading environment first. Imagine you are betting whether your kite can fly outdoors or not. You can try to optimize the kite’s aerodynamics OR you can optimize your ability to read weather conditions. If there’s a storm outside, no matter how poorly designed the kite is, it will still fly. Even with poor aerodynamics, it will fly. If there’s no wind at all outside, no matter how perfect the kite design, it will not fly. Therefore, understanding weather conditions is much more important than designing the kite perfectly. The kite = your trading strategy The weather outside = current market conditions I perform 2 steps to scan the market:

1. Check trend direction on Velo
2. Mark “interesting potential” coins from both Velo and Orion I will go into these 2 steps below ↓ Step 1. Check Trend Deviation on Velo

A quick thanks to @velo_xyz for building an excellent data analysis platform. 🤝

When trying to determine the trend from Velo (or any filtering tool you prefer), there are 3 possible outcomes: Most coins drop sharply during the day. (Downtrend)Most coins have evenly distributed profits. Some coins go up, some go down. (No trend)Most coins surge strongly during the day (Uptrend) In most cases, I will choose Option 2, because most coins have evenly distributed profits most days. This is quite normal and perfectly fine if there is NO specific trend on a particular day. In rare cases, I will choose Option 1 and Option 3, because it’s an exceptional event (rare situation) when all Altcoins are wildly increasing/decreasing in one direction. Here’s how I proceed based on my trend:

Most of the time, I will “not have a specific trend bias,” so to compensate, I only look for high-quality trading setups. The only exception I accept lower-quality setups is when I have a clear bias toward a specific trend. 🐻Bearish bias: I can accept lower-quality short setups, but must be more strict with higher-quality long setups. 🐂Bullish bias: I can accept lower-quality long setups, but must be more strict with higher-quality short setups. ⚠️No specific trend bias: only look for standard trading setups I usually perform. Step 2. Mark “Interesting Potential” Coins Here, I will use both Velo and Orion to help me mark coins “with interesting potential.” When I have a list of about 5 or 6 coins, I move to Step 3 (which I will explain in more detail below) and perform some technical analysis (drawing support/resistance levels on the coins and setting alerts) for those coins. There are 2 main factors that make a coin “with interesting potential” for me to trade reversals:

1. The coin mostly moves sideways within a range (instead of trending in one direction)
2. The coin recently had a sharp vertical move up or down First, I start with the Spaghetti Chart on Velo with the most volatile coins of the day to help me identify any potential volatility ranges.

Add them to my TradingView watchlist. ⚠️Note: When marking, I am preparing a list of coins for technical analysis in the next step. ↓

Next, I switch to Orion Terminal. Here, I scroll down to see the list of all Altcoins (except “main” coins like BTC, ETH, LTC, XRP, etc…).

I mainly look for perpetual altcoins with high volatility, low market cap, and trading volume of at least $500,000 in the last 5 minutes. I will look for exactly 2 things as I do with Velo:

1. I quickly scan all charts of coins with at least $500,000 trading volume in the last 5 minutes and mark any coin that looks like “volatile/sideways.”
2. I use “5-minute change” to help detect any coin that has recently increased or decreased more than 1.5%. A large move of 1.5% or more within 5 minutes likely indicates a “rapid spike” in price action, which is very good for reversal trading. I will discuss this further later in this article.

❗️TIP: Setting alerts on Orion is quite simple and very useful to get notified whenever a coin moves quickly. Lesson 4. Support/Resistance Levels I Like to Trade + Setting Alerts At this point, I have marked about 5 or 6 “quite interesting” coins for trading today but haven’t analyzed any of them yet. The next two steps I need to do immediately are: Draw support/resistance levels on each marked coin Set alerts In this part of the article, I will talk about “where” I like to trade. I will explain in detail “how” I trade in the next section. Choose the levels I trade at ↓

The more USD volume is in limit orders at a certain price, the more momentum there is to hit that limit order with market orders. The more market orders are executed, the more I can predict that more volatility will follow. I mainly look for swing highs and swing lows.

Highest swing = I look for shorting opportunities ⤵️ Lowest swing = I look for buying opportunities ⤴️ But I will focus on price levels that are at least about 1 hour away from the pivot point. This is because the farther the price is from a level for a longer time, the more market participants have had time to place limit orders at that level. ❗️NOTE: Generally, the longer the price stays away from a level, the more I can expect many limit orders to be placed at that level (assuming all other factors are equal).

✏️When drawing support and resistance levels: I only consider 2 support and 2 resistance levels that are most important. The reason is that drawing a support or resistance level where the price has not yet reached is a waste of my time and attention. 🚨When setting alerts: I will set 2-3 alerts “on the way” to a support or resistance level and one more alert directly at that level. The reason is I want to be notified when the price approaches support or resistance so I have time to prepare and make decisions. This is much better than getting notified exactly when the price hits support or resistance and having to make quick decisions. Lesson 5. My Logic on Entry/Stop Loss/Take Profit Rules So in Lesson 4, I talked about “where” I like to trade. In this lesson, I will talk about “how,” meaning the specific way I execute a trade. There are 2 main ways I use for reversal trading:

1. Failed Breakout Reversal

2. Rapid Spike Reversal I will give explanations in text + example screenshots below. Failed Breakout Reversals ↓

3. Entry point: Price must touch a resistance level, get rejected, and then close back on the other side.

4. Target: next support/resistance level (reversal point). Since my goal is “limit orders,” I want to exit the trade at the point where market orders are executed. This means ideally I will take profit at the point where breakout traders’ stop-loss orders are triggered.

5. Stop loss: identify the next reversal point (in the same direction). I usually trade with a stop-loss at 1-1.5 times the reward ratio. In rare cases, I will trade with a stop-loss at 1.5 times the reward ratio or higher. Fast Spike Reversals

An example of executing a trade is shown below ↓

1. Entry point: Price “spikes up” to a resistance level, then gets rejected by closing back below that level. I will enter the trade as soon as a “structure break” occurs.
2. Stop loss: The “highest” point of the spike, after the structure break.
3. Profit target: The starting point of the spike or a standard 1R target (1R = equal distance from entry to stop loss). Lesson 6. How I Determine the Quality of a Trade (Low/Medium/High) Therefore, it is crucial to understand that when trading ANY strategy, not all trades are the same, even if they follow the same entry/exit rules.

Here are the 3 most important variables I use to determine the quality of a trade ↓

Variable 1) How did the price approach that level? (Ideally, a rapid spike) Variable 2) What does the trading volume look like? (Ideally, decreasing) Variable 3) What does the price action on the left side look like? (Strong volatility within a narrow range)

The more variables agree, the higher the trade quality. The more variables conflict, the lower the trade quality. ✅3/3 Agreeing Variables✅: For the highest quality setups, I will risk the most AND aim for wider targets. ⚠️2/3 Agreeing Variables⚠: Most of the time, the market will not give me perfect setups. Most of the time, they will not be perfect with 1 variable against me. That’s okay and not a problem as long as most trades favor me (when 2/3 variables agree). This is when I need to use my judgment to say “no” and reject some lower-quality trades. ❌1/3 or 0/3 Agreeing Variables❌: I absolutely DO NOT take the trade. This is when I seriously consider doing the opposite (breakout) because these situations are really not good for reversals. High-Quality Reversal Trade Example ↓

How does the price approach the resistance level? Rapid spike✅ What does the volume look like? Sideways ⚠️ (not perfect, but acceptable) What does the left chart look like? Very volatile/sideways ✅ Low-Quality Reversal Trade Example ↓

How does the price approach the resistance level? Slow movement ❌ (not good for reversal) What does the volume look like? Increasing ❌ (not good for reversal) What does the left side of the chart look like? Staircase price action ❌ (not good for reversal) ❗️NOTE: A coin with price + volume behavior like this will be better for breakout trading than reversal trading. ⚠️NOTE FOR READERS⚠️ Before moving to Lesson 7, I will do my best to include all additional Tips I consider important for reversal trading below ↓ Additional Tip #1: “Time before structure break” vs “Trade quality” Observe when trading rapid spike reversals on the 1-minute timeframe 👀 • Shorter structure break time is better for reversal trading. • Longer structure break time is worse for reversal trading.

Additional Tip #2: The more trading volume at the “peak” of the spike, the more I can predict a stronger reversal. Money-making strategy from trapped Shorts:

• Price “spikes up” into a range • Breakout Shorts enter and get trapped • Long after structure break • Price returns to the original spike point • Exit at the original spike point to take profit

Simplified ↓

Only one thing truly moves the price: “market orders being executed.” ↓ People can OPEN positions with market orders and also CLOSE positions with market orders. But the important thing to remember here is: OPENING a position is VOLUNTARY. You have the choice whether to open a buy position when the price starts to reverse. CLOSING a position is MANDATORY. If the price starts moving against your expectation, you will be forced to close the position with a loss, and a stop-loss or liquidation order will be triggered. ❗️TIP: To move the price from the Entry point to the Target point, market orders must be executed AFTER you enter. I need other traders to OPEN and/or CLOSE orders after I do. As mentioned above, OPENING IS VOLUNTARY and more competitive (because it’s a speed race with other capable traders trying to join the same trading idea as me). However, since CLOSING is MANDATORY, this is a much more reliable indicator. ❗️TIP: The more traders get trapped and then close their positions = the more pressure they exert on the price to move toward my target. Compare the two examples below ↓ Example 1: $100,000 short position gets trapped. When half of them close, only over $50,000 in buy orders are executed. $50,000 in buy orders will not push the price much, even in a thin order book. Example 2: $5 million short position gets trapped. When half of them close, over $2.5 million in buy orders are executed. The price is likely to move significantly with over $2.5 million in buy orders in most perpetual altcoins. KEY POINT:

This is why “Step 1” in my method of trading rapid spike reversals is so important: “Price first hits a major resistance level where many limit orders are placed.” More limit orders = more fuel for the fire. Illustration below ↓

Additional Tip #3: Use MA or VWAP to assess the regime

The above principle applies to any type of moving average line, so whether you use MA, EMA, VMA, VWAP, or any “average price,” the concept remains the same. Not touching the MA line = more likely a trending environment. (not good for reversals) ❌ Touching the MA line multiple times = more likely a sideways/volatile environment. (good for reversals) ✅ Lesson 7. How I Cut Losing Trades Before They Hit Stop Loss ↓ Before diving into this topic, I want to give a quick context: My trading profit at the end of the month will be based on the total “expected value” (EV) I can obtain from the market. There are 4 variables that determine the EV I can receive each month:

1. Frequency (average number of trades per month)
2. Average profit size
3. Average loss size
4. Win rate (%) This lesson is about reducing Variable #3 (Average loss size) while keeping most other factors constant. If we lose less on losing trades while keeping everything else the same, the expected monthly profit will increase. To cut losses early, before hitting the stop-loss point, I need an “invalidation condition.” An invalidation condition is a condition that, if met, signals that my idea is “no longer valid” or “wrong.” ❗️TIP: I prefer to use IF → THEN statements. IF X happens, THEN close the market. The two main methods I use for invalidation are: Price-based and Time-based
5. Price-based invalidation: IF “price action moves in a specific direction” → THEN close the trade
6. Time-based invalidation: IF “enough time has passed” → THEN close the trade. 1 ) Price Based Invalidation There are 2 terms I need to quickly define before proceeding: MAE = Maximum Adverse Excursion FTA = First Trouble Area

The more I understand the average distance the price moves against my prediction in winning trades, the better I know how much “room” I need to give my trades. Example: Suppose winning trades, on average, move -0.3R against the prediction before reaching the target. If the current move is -0.2R against the prediction, I have no reason to panic. The trade is still functioning as an “average winning trade.” I just need to be patient and hold. If the current move is -0.8R against the prediction, I should seriously consider closing the trade. Because this is an abnormal “misdirection” level in a trade. My winning trades usually do not move this far against the prediction, so closing the trade makes more sense. My principle for closing before hitting the Stop Loss: IF “a candle closes beyond the FTA” → THEN “close the trade.” FTA = “First Trouble Zone,” just a level on the way to the stop-loss point. How I set the FTA depends on my average MAE for the trade: Higher quality trades = lower MAE = tighter FTA (less room) Lower quality trades = higher MAE = wider FTA (more room) In other words, the higher the trade quality, the easier it is to recognize when my idea is invalidated and to cut losses early (to accept smaller losses). ❗️TIP: If you collect data on the maximum drawdown of winning trades, you can find the average MAE value for each winning trade. Knowing this number helps you cut losses faster and more accurately. 2. Time-based invalidation 🤔QUESTION: 🤔 An average winning trade takes about 45-60 minutes to unfold. If I get stuck in a trade for 600 minutes, does it still behave like a normal winning trade? 💡ANSWER: 💡 No, it does not behave like a normal winning trade. 🧠KEY POINT: 🧠 The more abnormal my active position is compared to my average winning trades, the more reason I have to close early and exit. I want to EXIT trades that are NOT behaving like my average winning trades. I want to KEEP trades that are very similar to my average winning trades. CONCLUSION If you’ve read this far, congratulations! 🫡 Here is a quick summary of the 7 lessons:

1. Reversal trading is about betting on the price “bouncing up” from a support/resistance level, not “breaking” a support/resistance level.
2. Reversal trading is easier in a sideways environment than in a trending environment.
3. I always perform “Market Scanning” before starting a trading session. My goal is to grasp the current market situation and select some interesting potential coins.
4. I always trade at swing highs and swing lows. I set multiple alerts on the way to support/resistance levels to ensure I get notified when the price approaches those levels. I want enough time before making decisions.
5. I trade “failed breakouts” and “rapid spike reversals.” Both are based on the same core idea. Price hits a threshold, breakout traders participate, price starts to get rejected from the threshold, breakout traders get trapped outside, I enter the trade, and as trapped traders start closing their positions, the price moves closer to my target.
6. There are 3 key variables I consider for all reversal trades. Approach the threshold (recent 1-10 minutes). Volume. The shape of the left side of the price action (4-8 hours ago).
7. I cut the trade if I see a candle closing through the FTA. The position I set for the FTA is based on my MAE data.