Strategy Logic

The moving average percentage reversal strategy generates trading signals by calculating the percentage differential between price and a moving average.

Trades are taken when the percentage gap between price and the MA reaches preset levels.

Specifically, the logic is:

1. Calculate the absolute difference between price and an N-period MA
2. Convert the difference to percentage terms, i.e. divide by price
3. Go short when the percentage gap exceeds an upper threshold (e.g. 5%)
4. Go long when the percentage gap falls below a lower threshold (e.g. -3%)
5. Optionally reverse signals (longs become shorts, shorts become longs)

E.g. with N=14, upper limit=5%, lower limit=-3%:

• Go short when price is >5% above the 14-day MA
• Go long when price is <3% below the 14-day MA

Parameters N, upper/lower limits can adjust sensitivity.

Advantages

• Percentage gaps account for changing price levels
• Adjustable parameters suit different cycles
• BREAK strategy aims to catch trend turning points early

Risks

• Percentage gaps alone cannot confirm trend direction
• Prone to false signals, needs additional filters
• MAs lagging, may not catch reversals promptly

Summary

The MA percentage strategy uses the percentage gap between price and MA to identify potential turning points, with a BREAK approach. Adjustable parameters can adapt to varying market conditions, but lag and whipsaws are risks needing mitigation.