Strategies
Mean Reversion Strategy
Fade extended moves by trading the return to average price — best in range-bound or choppy markets.
Key rules
- Best in range-bound, non-trending markets
- Enter at extremes: outer Bollinger Bands, key S/R, RSI >70 or <30
- Require a reversal candle signal at the extreme
- Target the mean (midpoint, moving average, centre of range)
- Stop beyond the extreme — tight stop relative to the target
Mean reversion is based on the concept that price tends to return to its average value after an extended deviation. When a market is range-bound or trading in a defined channel, prices that stretch too far from the mean are likely to snap back.
**When It Works Best** - Ranging markets with clear horizontal support and resistance - After extreme, overextended moves on news or sentiment spikes - At statistically significant price deviations (multiple standard deviations from the mean) - In markets with mean-reverting characteristics (commodities, currency pairs in sideways phases)
**Indicators Used** - Bollinger Bands: trade reversals at the outer bands - RSI: fade extremes above 70 (short) or below 30 (long) - Standard deviation channels
**Entry Criteria** - Price at an extreme (outer Bollinger Band, key S/R, RSI extreme) - Reversal candle signal (pin bar, engulfing, divergence) - Volume declining at the extreme (momentum waning)
**Risk** Mean reversion fails in strongly trending markets. Always check the higher timeframe — if the higher timeframe is in a strong trend, mean reversion entries on the lower timeframe fight the trend.