Mean Reversion

Mean reversionThe tendency of prices to return to an average. is the philosophical opposite of trendThe prevailing direction of price: up, down or sideways. following. Instead of betting a move continues, you bet that a price stretched far from its “normal” level (its mean/average) willArranging how your wealth passes on after death. snap back toward it. Buy the oversoldA condition suggesting price has fallen too far, too fast. dip, sell the overboughtA condition suggesting price has risen too far, too fast. spike.

• Best in ranging markets — it thrives when price oscillates around a stable mean (low-volatilityThe size of price swings — not their direction./range regimes from the volatilityThe size of price swings — not their direction. module).
• Worst in strong trends — fading a powerful trendThe prevailing direction of price: up, down or sideways. (“it’s overboughtA condition suggesting price has risen too far, too fast., it must drop”) is exactly the overboughtA condition suggesting price has risen too far, too fast.-trap mistake; this is how the big losses happen.
• Stops are mandatory — because the rare non-reversion can be huge, a strict stopA pre-set exit that caps your loss if a trade goes wrong. converts a potential catastrophe into just another small loss.