Strategies
Mean Reversion: Trading the Return to Average
Mean reversion profits when price overextends from its average and snaps back — best in ranging markets.
Key rules
- Most effective in ranging, oscillating market conditions
- Enter when price significantly deviates from a key moving average
- Exit at the mean or short-side resistance, not beyond
- Dangerous in trending markets — do not fade strong trends
- Use RSI or Bollinger Bands to confirm overextension
Price tends to oscillate around a mean (often a moving average). When price deviates far from the mean, it is statistically more likely to revert. This strategy performs well in ranging markets and poorly in strongly trending environments.
The key risk is that a 'mean reversion' setup can become a trend extension if a fundamental shift occurs.