Mean Reversion Trading with VWAP and Z-Score

Finance-focused summary (Mean Reversion using VWAP + Z-score + Trend Filter)

Core Idea

Mean reversion assumes price has a “fair value” anchor (a center of gravity). When price stretches far enough away, it may snap back.

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Methodology / Framework (Step-by-Step Rules)

1) Fair Value Anchor

• Use VWAP (Volume Weighted Average Price) as the anchor (“magnet”).

2) Extreme Measurement

• Use Z-score to measure how far the current price is from its average, expressed in standard deviations.

3) Trend / Risk Safety Filter (Crucial)

• Use ADX (Average Directional Index) with a 14-period setting.
• Trade mean reversion setups only when:
  • ADX(14) < 20 (non-trending/choppy conditions)
• Do nothing if:
  • ADX(14) > 20

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Trade Rules

Long (Buy) Entry Conditions

All must be true:

• ADX(14) < 20
• Price below VWAP
• Z-score ≤ -2

Trigger / confirmation:

• Wait for a bar close slightly higher than the prior bar (a small upward close) to enter.

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Short (Sell) Entry Conditions (Mirror Rules)

All must be true:

• ADX(14) < 20
• Price above VWAP
• Z-score ≥ +2

Trigger / confirmation:

• The short entry is described as the opposite/confirmation concept of the long entry (confirmation aligned with the intended mean-reversion move).

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Exit Conditions

Main Exit

• Exit when price returns to VWAP.

Alternative Exit

• Exit when Z-score returns to 0 (the stretch is “over”).

Optional Profit-Taking (Partial)

• Take partial profits when Z-score moves halfway back:
  • For longs: from -2 up to -1

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Risk Control / Protections (Non-Negotiable)

• Always set a stop loss, ideally based on ATR (Average True Range) to adapt to recent volatility.
• Position sizing: risk no more than a small fixed % of capital per trade (exact % not specified).

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Key Numbers / Thresholds Explicitly Stated

• ADX threshold: trade only if ADX < 20
• Z-score entry thresholds:
  • Long: Z ≤ -2
  • Short: Z ≥ +2
• Z-score exit threshold: Z = 0
• Optional partial profit zone (long): -2 to -1

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Cautions / Common Mistakes Highlighted

• Ignoring the ADX filter (major pitfall).
• Taking a “big” Z-score signal without confirming the market is non-trending (again tied to ADX).
• Over-sizing positions because the setup looks extreme—risk management comes first.

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Disclosures / Recommendations

• No explicit “not financial advice” disclaimer appears in the provided subtitles.
• The speaker emphasizes discipline: follow a systematic ruleset rather than relying on “gut feelings.”

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Tickers / Assets / Instruments Mentioned

• None mentioned (no specific tickers or instruments provided).

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Presenters / Sources

• No presenter names or external sources provided in the subtitles.