Mean reversion day trading strategy for US stocks after a sharp drop

A mean reversion day trading strategy for US stocks: fade a sharp drop, but only once the drop has stopped. When price has stretched far below its own average with sell pressure still dominant, the snap-back is the trade — and the hard part is not the entry, it is refusing to take it too early.

1. The rule

# BUY — the fall has to have stopped first if ChangePct < -4 and Strength < 60 and Price > LowestPrice(120): Buy()# SELL if ProfitPct >= 1.0 or ProfitPct <= -0.8 or HoldTime >= 1200: Sell()

2. Why these conditions

Strength is cumulative buy volume over cumulative sell volume times 100, capped at 500. Below 100 means sellers have been hitting the bid on balance. Remove the third condition and this becomes a knife-catching strategy. That single line is the difference between fading an exhausted move and standing in front of one.

3. When it fails

It fails when the drop is news-driven and the news is still developing. Price comes off the low, triggers the entry, and makes a new low ten seconds later. Nothing in these conditions can tell the difference between a technical flush and a company in trouble. It also fails on very low-priced names, where a four percent move is one tick and the spread is another. We measured that: a third of all quotes in this population are already one cent wide, and on a $1.50 stock that single cent is a 0.67% round trip (what day trading a US stock really costs).

4. What the round trip asks of it

This is the uncomfortable one. A 1.0% target against a 0.8% stop needs to be right 44% of the time before costs. With the measured 0.75% round trip it needs 86%. A counter-trend strategy with a one percent target is, on this population, structurally very hard. The fix is not a better entry. It is a bigger target or a cheaper population — which is exactly what the first change below does.

5. What to change first

Add a liquidity floor before you tune anything. DayAmount > 5000000 on the entry line removes the names where the fill costs more than the reversion is worth — see liquidity filter you can put in front of any day trading entry. Then widen the target. Going from 1.0% to 2.0% moves the break-even from 86% to 55% without touching the entry at all. After that, try LowestPrice(300) instead of LowestPrice(120): a longer confirmation window means fewer and later entries, which is usually the right trade for a counter-trend idea. Test it on your own recordings — how to backtest a day trading strategy on US stocks.