Lexicon · Strategies
What is mean reversion?
Mean reversion is the idea that a price that moves far from its average tends to move back toward that average over time.
Updated
(01) Explained
Mean reversion, in plain terms.
A mean reversion strategy measures how stretched price is from an average, for example in standard deviations or with an oscillator like RSI, and bets on a move back toward it.
It's the opposite of trend following: it buys weakness and sells strength instead of following the move.
(02) Example
Mean reversion written as rules
- When: a 4h close two standard deviations below the 20-period mean.
- And: RSI below 30.
- Exit: when price is back at the mean, or at a 4% stop.
- An example of the format only, not a trade recommendation.
(03) Why it matters
What to watch for.
- Trends break it. Price can keep moving away from its average for a long time, so a stop matters.
- The average moves too. In a falling market the mean falls with price, so the target keeps shifting.
- Test it first. Whether a market tends to revert on a given timeframe is an empirical question: backtest it.
(04) In The Market Lexicon
Where it shows up in the product.
Mean reversion is one of the example strategies in The Market Lexicon's strategy builder, written as plain rules with no code.
See the example strategies →Related terms
Test ideas like this on real market history.
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