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The Anti-Outlier Trade

by | Tips & Strategies

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)

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

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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

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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© 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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The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

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