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Short the dip, long the correction

  • Hi everyone,

    Thanks again for the wonderful platform and helpful community! I'm still impressed at all the great activity here! I have a trading question and I'm trying not to reinvent the wheel. Hopefully someone might be able to point me in the right direction.

    Is there a "standard" or "common" approach to configure a series of trades that will short a dip and then long the correction? I'm thinking some combination of trailing stops could do this but I don't want to spend my time futzing around if there's an accepted method that people use for this purpose.

    Let me give you a simple example (for illustration)... When earnings come out for a security and they are worse than analysts expected, the price goes down (dip) and often overcorrects (goes down too far) so the market starts buying and the prices go up again (correction) until it finds its happy mean.

    What's the best trading strategy to capture profits on both sides? In other words, I want to short the dip and long the correction automatically.

    Thanks in advance!

  • administrators

    At the end of the day you are looking for Mean Reversion, i.e.: if the price has gone too far away from its average (moving), it will then tend to move back to its mean.

    Even Wikipedia has an article on the matter: Wikipedia - Mean Reversion (Finance)

    But some Googling will yield plenty of literature and advanced techniques on the subject.

  • Ah good point. I was (over)thinking of it as a momentum strategy.