One of the key tools of my trading strategy is mean reversion…

Meaning, I look for stocks (or indices) that have overshot in either direction… like a rubber band that’s been stretched too far.

Then, I aim to profit when they revert the other way… like a rubber band that snaps back.

The good news is that we can use this mean reversion strategy during multiple time frames.

Whether you’re looking at a daily, weekly, or even an hourly chart… the pattern remains the same. A stock overextends, and then reverts as buyers (or sellers) push it back from its extremes.

Today I’m going to show how I recently used mean reversion in my trading service, One Ticker Trader.

This week, we traded options on the SPDR Dow Jones Industrial Average ETF Trust (DIA).

In less than 24 hours, we generated a 23.5% return – marking our ninth winner in a row.

Let’s check out how the trade played out…

Lots of Countermoves

In the chart below, the 50-day moving average (MA – blue line) represents DIA’s long-term trend.

As we can see, the short-term 10-day MA (red line) crosses it several times. Take a look…

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

During each of these swings in the 10-day MA, there were lots of smaller countermoves too. And it’s these smaller countermoves that can offer opportunities to generate gains…

Leading up to our trade, the 10-day MA had bullishly broken above the 50-day MA on October 21. However, the Relative Strength Index (RSI) showed us DIA was overbought (1) on October 28.

(I recently wrote about another successful trade we did through The Opportunistic Trader using this reversal signal at 1.)

With DIA overextended at 1, sellers then pushed it down. But an upswing in buying momentum caused it to rally again.

This time, the RSI made an inverse ‘V’ at 2. Once again this showed DIA was overbought. The RSI was setting up DIA for another potential reversal.

However, there was also another signal showing momentum had turned against DIA.

Take another look at the chart…

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

While DIA was making higher highs (upper orange line), the RSI was making lower highs (lower orange line). This is a common pattern prior to a change in direction.

So on Tuesday November 8, we took out a short position on DIA. We bought a put option to capture any potential reversal. (Note that a put option should increase in value if a stock price falls.)

The next day, DIA opened lower and dropped throughout the day. That allowed us to sell our put option on Wednesday for a tidy 23.5% profit.

And while a nice little profit is always welcome, it wasn’t the only reason we sold…

We Don’t Leave Profits on the Table

With inflation figures due for release on Thursday November 10, we didn’t want to run the risk of leaving profits on the table.

And it’s a good thing we sold. DIA rallied strongly off lower-than-expected consumer price index (CPI) data.

Our quick trade demonstrated exactly why I focus on just putting a “P” (profit) on the page rather than getting greedy or swinging for the fences.

And by using options, we supercharged our return.

But even if we had used shares, our DIA trade analysis proves that – by capturing smaller moves within large countermoves – there are plenty of opportunities for nimble traders.

Our One Ticker Trader subscribers are learning that these small profits quickly snowball into something larger.

With nine wins in a row, we now have an accumulated return of 115.8% since we launched in August.

If you haven’t already joined us on these trades, I’d love to explain more.

You can go right here for more details about our strategy.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, subscribers to One Ticker Trader and to The Opportunistic Trader thank Larry for his trade recommendations…

Greetings Mr. Benedict,

I watched your first recommended trade last week which was a 26% profit.

For the second recommendation, I followed your recommendation to the letter. I had to place a limit order for $5.35 – so as not to chase the price. The order filled on November 9. As you recommended, I limited my trade to 10 contracts based on my portfolio.

When I received your sell at market notice, I did just that and made a decent profit. Taking small bites of the apple seems to be a great strategy. Next time, I’ll increase the number of contracts. I’ll continue to do this until I reach my comfort threshold with your system.

I’m convinced your trading strategy will enhance my portfolio better than any strategy I have tried in the past. Thank you for sharing this opportunity!

– Frank B.

Hello Larry and team,

I just want to express my appreciation for your One Ticker Trader and Opportunistic Trader services. It’s a huge help to me and my family right now when almost everything else in my portfolio is in the red.

So far in November, I’ve been able to book an average gain of 19.98% on four trades – in an average holding time of 3.75 days. That’s a solid return in this market environment!

Thanks so much for the difference you’re making for me and my family. Keep up the great work.

– Mike S.

Hi Larry,

Great timing on the DIA trade. I always buy a deep, in-the-money position with a delta value of about .80. While your out-of-the-money trade made 25%, mine made 112%.

– Stuart O.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day at feedback@opportunistictrader.com.