The financial markets tend to have average pricing over the longer term. This is quite often looked at as a smoothing mechanism, and deviation from that average can often lead to reversals that are due to exhaustion. This simple trading strategy uses that as a factor as to when to place a trade. On this chart, the silver weekly chart, I have placed the Standard Deviation indicator at the bottom of my Metatrader 4 platform. As you can see, I have one level, the 2.0 level, marked on the indicator at the bottom of the chart. When the green line rises above the 2.0 level, it means that the market is more than twice the distance away from the overall average that it typically is. Using the idea of standard deviation in mathematics, we know that 95% of all statistical averages fall within 2 standard deviations of the mean. That’s exactly what this trading strategy is all about. It’s about markets getting too far ahead of themselves. When you look at this chart, you can also see that I have the 20 Moving Average on the chart, but that’s essentially for illustrative purposes. As you can tell, early in 2013, Silver markets had bounced rather drastically and coinciding with this was an explosion in the standard deviation. In fact, we had reached as high as 3.57, something that is unsustainable. As we had been in a downtrend, the real trade would have been to play the bounce initially, and then on the exhaustive candle as we were still well above standard deviation, to sell. A more patient trader would have simply sold as it went with the overall downtrend. You can play this either way, and you played on all time frames. By selling silver at that point, you’ve seen a gradual decrease in the value of silver and we have stayed within 2 standard deviations since. Watching this indicator can give you an idea of when a significant turnaround is about to happen.

One of the most common patterns that you will see on a training chart is the rectangle. The rectangle is essentially a simple consolidation pattern where you have obvious support and resistance. The markets just grind back and forth before making a decision. Because of this obvious pattern, you have the rest of the market noticing these levels as well. That’s the beauty of this strategy: it’s so obvious that other traders are waiting for the same thing. On the attached AUD/NZD daily chart, you can see that the market had found significant resistance at the 1.0550 level, while having significant support at the 1.0375 handle underneath. Traders simply had to wait for a daily close outside of that rectangle to start going long of the market. Tradition dictates that a traitor will put their stop loss half way into the rectangle that was just broken out of, and as you can see your trade would have been protected. The target is quite often the same height as the rectangle, and since you have a stop loss with only half the distance, you have a build in 2 to 1 ratio.