Mastering Mean Reversion with Linda Raschke's 80-20s Strategy

The 80-20s Strategy: A Mean-Reversion Approach

Linda Raschke's 80-20s strategy is a mean-reversion technique that capitalizes on the tendency of markets to revert to the mean after an extreme price move. The strategy is particularly effective in range-bound or choppy markets.

The Logic Behind 80-20s

The strategy is based on the idea that when a market opens near one extreme of its daily range and closes near the other, there is a high probability of a reversal on the following day. The name "80-20s" comes from the concept that if a market opens in the bottom 20% of its range and closes in the top 20%, it is a candidate for a short trade on the next day, and vice versa.

Entry and Exit Rules

• Long Setup: The market opens in the top 20% of its daily range and closes in the bottom 20%. A buy order is placed above the high of the signal day.
• Short Setup: The market opens in the bottom 20% of its daily range and closes in the top 20%. A sell order is placed below the low of the signal day.
• Stop Loss: The stop loss is placed below the low of the signal day for a long trade, and above the high for a short trade.

Practical Application: SPY 60-Minute Chart

Imagine the SPY opens at $400, rallies to $405, and then sells off to close at $401. This would be a potential 80-20s short setup. A trader would place a sell stop below the low of the day, with a stop loss above the high of the day. The profit target could be a 1:1 or 2:1 risk-to-reward ratio.