Trend Following or Mean Reverting

The Trend Following or Mean Reverting indicator is a strategy-based tool designed to help traders identify the underlying nature of a financial instrument by analyzing its price action relative to previous extremes.

Usage

The indicator functions by executing trades based on the breakout of the previous day's price range. It can be used to diagnose the market regime of a specific asset over a period of time:

• Trend Following Identification: If the equity curve produced by the strategy is in a sustained uptrend, the instrument is exhibiting trend-following characteristics.
• Mean Reverting Identification: If the equity curve is in a sustained downtrend, the instrument is exhibiting mean-reverting characteristics, suggesting that breakouts often fail and return to the mean.

The logic follows a simple execution rule:

• A Long position is entered when the current close is higher than the previous bar's high.
• A Short position is entered when the current close is lower than the previous bar's low.

Details

This script is inspired by concepts shared by Rayner Teo. It serves as a diagnostic tool rather than a standalone trading system. By observing how a simple breakout strategy performs on a specific ticker, a trader can determine whether they should apply trend-following systems or mean-reversion systems to that particular market. The script utilizes the strategy() function to provide a visual equity curve, making the classification of the market regime straightforward.

Settings

• Default Quantity Type: Sets the units used for trade sizing (e.g., percent of equity).
• Default Quantity Value: The numerical value for the trade size.
• Overlay: Determines whether the signals and strategy labels appear directly on the price chart.

FAQ

How do I interpret the results of the Trend Following or Mean Reverting tool?

If the backtesting results show positive growth, the asset responds well to momentum and breakouts. If the results are consistently negative, the asset likely reverts to its average price after making new highs or lows.

Can this script be used on intraday timeframes?

Yes, while the original logic references "yesterday's" highs and lows, the Pine Script implementation uses the previous bar's data (high[1] and low[1]), meaning it adapts to whatever timeframe is currently selected on your chart.

How do I get access to the Trend Following or Mean Reverting indicator?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.