Mean or expected value used in the distribution formulas could be calculated using

all sorts of interpolators. Moving average has a very bad reputation of being "late"
and not representing the "mean" as such that the distribution of the price over it
would be stable. There are higher degree polynomials that accomplish this task
much better.
Cubic spline interpolations is the family of curves that GUARANTEE Gaussian
distribution around each point! Congratulations! Very good! Now, the challenge is to
design a practical algorithm to exploit this phenomenon

The cubic spline has a very important variational interpretation, in fact it is the
function
that
minimizes
the
functional
J(f)=\int_a^b

|f''(x)|^2

dx,

over the functions in the Sobolev space H2([a;b]).....

Indeed! That is what it makes so perfect for the RTM methods! More so, for
different markets one can use different spline rigidness resulting in different
parameters of the price distribution around any predicted point. In fact, there is an
optimization procedure (could be reduced to a linear programming task in Sobolev
space) that could optimize spline coefficients to match desired dispersion and
density of the target distribution making it stable and very much predictable!

Trading mean reversion isn't about pinpointing value and trading forecasts, its
about statistically defining what an overvalued or undervalued price trades like.

What, I think, you are all missing is the Galton's principle of derivative reversions
demonstrated in his QUINCUNX device. It is the most important principle in
constricting
a
usable
RTM
method.
http://www.bun.kyoto-u.ac.jp/~suchii/quinc.html
http://www.thearling.com/text/sfitr/sfitr.htm

This article makes one wrong assumption. It considers constant mean to determine
the deviation as an input for their predictor. Flexibility of the mean impacts
prediction significantly. Any practical RTM method should be based on a stable
relationship between the mean deviation and the price deviation to that mean. If
the majority or runs ensure that the mean deviation is smaller than the price-to-

mean deviation than the algorithm has positive expectations. if it is not than the
method is under the danger of a significant ruin.

Random Processes and Uniformly Distributed Random Generators that are usually
used to form a Random Walk. Many random processes have very stable and
predictable distribution patterns thus enabling us to efficiently deal with them

So, the key to success in trading is to find a very frequent, stable pattern and
exploit it based on its known distribution

Any STABLE distribution has a logic (set of trading rules) that has positive
expectations. For example: if the markets were truly Gaussian then the short option
strangle positioned at 2 STD would be 100% guarantee winning strategy providing
there is a stop loss at 1 STD. You can verify it for yourself. However, the markets, of
course, are not Gaussian. So what would be the measure that would determine the
"Skew" in its distribution? You are right, one of them is arcsine law, another is the
"Mean Deviation Ratio" = squareroot(2n/pi) where n is the number of steps that the
market makes on average to reach a certain price change. One can use it to
determine the exact skew and build the algorithm to exploit it. Interesting, isn't it?

Mean Deviation of m random walks with n steps each = sum(squareroot(2n/pi))/m

But what I think Maestro is talking about is using numerical analysis to curve fit a
function (polynomial function and maybe even a Transcendental function) to the
data and then building a distribution of the deviations from the function (which I
think if the curve fit is done correctly) that will follow a normal distribution or
another distribution that allows him to calculate the probability accurately enough
in order to fade the movement of the market with the expectation of the price
reverting back to the value of the function (which is changing with every trade).
The challenge of doing this I think is trying to figure out how to curve fit the
function.

Right on the money, dtrader98! cubic spline interpolations is the family of curves
that GUARANTEE Gaussian distribution around each point! Congratulations! Very
good! Now, the challenge is to design a practical algorithm to exploit this
phenomenon and you have your Holy Grail!

by using predictive interpolators (such as splines) you can see sometimes that the
mean is moving faster than the deviations from it. That enables a trader to decide
what to do: follow the mean or expect the retracement.

If you create a step function (let's say 5 point step) and convert ES data into
this function you should see that the number of steps vs. absolute move on
the long run ( I did it over 4 years) matches exactly the formula quoted
above. To me it is a solid proof that the price data if plotted not on
price/time scale but price/step scale is almost 100% Gaussian. It leads to
many profound conclusions including the utilization of the interpolators (such
as splines) on the price/step plane. The tools such options and other existing
tools become very efficient in the harvesting of the uncovered price
distribution.