Philosophically, it's harder to manage risk for mean-reversion trades vs trend, because the trade looks more attractive the more it goes against you. If you're short a spread at 1std, you definitely want to be short the spread at 2std, 3std all the way until you get liquidated.
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You could be wrong that the spread was going to decrease from 50 to 0, but right that it is going to decrease from 200 to 50, for example. But you’re right, for certain kinds of spread trades the right questions to be asking are “how are other players positioned” and
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“who has the capital to close this spread, and at what level does it become attractive to them?” — narrow spreads are fundamental trades, blowout spreads are technicals/capital/positioning trades.
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Beautifully put!
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