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The idea that a price which has moved far from its typical level often drifts back toward that average over time. It is a historical tendency, not a guarantee.
Why It Matters
Mean reversion is one of the two big families of trading ideas (the other is trend following). It assumes stretched-out moves tend to snap back toward an average. It's an observed tendency in some markets and time frames, not a law — a price that looks 'too low' can always keep falling. Many algorithmic strategies measure how far price has strayed from a moving average and act on that gap, but the assumption behind them can and does break.
Key Points
- Assumes extreme moves tend to pull back toward an average
- A tendency in some conditions, never a guarantee
- The opposite instinct to trend following
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Common Questions
The idea that a price which has moved far from its typical level often drifts back toward that average over time. It is a historical tendency, not a guarantee. Mean reversion is one of the two big families of trading ideas (the other is trend following). It assumes stretched-out moves tend to snap back toward an average.
Mean reversion is one of the two big families of trading ideas (the other is trend following). It assumes stretched-out moves tend to snap back toward an average. It's an observed tendency in some markets and time frames, not a law — a price that looks 'too low' can always keep falling. Many algorithmic strategies measure how far price has strayed from a moving average and act on that gap, but the assumption behind them can and does break.
Assumes extreme moves tend to pull back toward an average
A tendency in some conditions, never a guarantee
The opposite instinct to trend following