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The Anti-Outlier Trade

Apr 6, 2021

By: Frank Kaberna

Most people like talking about a good outlier story: Can you believe bitcoin is up over 1,000% since the start of 2019? Did you see WTI crude oil futures went negative last year? How crazy was that rally in GameStop from below $20 to above $400 in a matter of weeks? 

But trading an outlier isn’t as easy. Increased volatility means you could be either really right or really wrong in a flash. Large swings mean a move against you could cause you to tap out before a move in your favor. And few people feel good about buying into an all-time high, or vice versa.

 

The Case for Mean Reversion

You know what’s not as fun to talk about, but occurs much more often? A market that approaches an outlier but ends up reverting to what’s deemed “normal.” Last week was ripe with mean reversion trades including a bounce back in metals, the convergence between technology and industrial stocks, and a pull back for both US dollars and interest rates.

 

Last Week’s Forecast via Realized Volatility (Small 10YR Yield \ S10Y)

0406_Smalls blog.png

Source: dxFeed Index Services (https://indexit.dxfeed.com)

How to Trade Mean Reversion

For example, Small 10YR Yield futures rose above 17.50 by the second day of last week before falling back to well within their projected five-day range (as shown above) by the week’s close. Getting on the other side of a slightly abnormal move (relative to historical prices and volatility) in a market can present opportunity more often than the large outlier alternative.

Small 10YR Yield \ S10Y

0406_smalls2.png

Source: dxFeed Index Services (https://indexit.dxfeed.com)

Near-outliers aren’t going to make you more interesting at your next dinner party, but they could present you with a simpler, more straightforward opportunity the next time you open your platform.

 

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Save Every Time You Trade the Smalls

The Small Exchange has also created a limited number of subscriptions for a one-time payment of $100 that give traders a lifetime of reduced exchange and market data fees when trading the Smalls.

For more information on the Small Exchange’s products and subscription service, visit smallexchange.com. And be sure to check out my new show on tastytrade, Small Stakes, where Pete Mulmat and I will show viewers how to navigate Small Exchange products every Monday-Friday and always on demand.

If you’d like to find out where to trade the Smalls products check out the list of brokers that offer their products, or tastytrade’s preferred broker tastyworks.


© 2021 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading futures involves the risk of loss, including the possibility of loss greater than your initial investment.


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