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What is a Reversal System?

The concept of a reversal system is one which stays in a market all the time but uses signals to reverse the direction of trading.

The Double Moving Average Crossover System is an example of a reversal system. This system enters the market long when a shorter term moving average crosses a longer term moving average in the ‘upward’ direction - and enters the market short when the crossover takes place in a downward direction.

So the ‘DMAC’ buys the market in an upward crossover and sells the market in a downward crossover. The first crossover opens a position and the second crossover closes that position.

In order to reverse, it is necessary to take the same size position in the opposite direction, which would be done by taking double the position size, when a crossover occurs.

Is it worth trading a reversal system?  

A professional trader will always tell you that the way to answer this question is to see how the proposed system runs – evaluate it and see!

But the idea of a reversal system is certainly an odd one. After closing a trade, would you always want to enter the market in the opposite direction? Wouldn’t there be times when the market was behaving in such a manner that you would want to be out of it?

For example, most traders would feel much more comfortable being out of a market which is very volatile. System traders spend time researching ways of identifying different market conditions and finding ways to trade when markets are safer.

However, they always test their conclusions and never try to assume what would be the best thing to do. In a thorough evaluation, the capabilities of any system will reveal themselves.


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Copyright David Bromley 2006
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