What is Mean Reversion in Trading?

Understanding Mean Reversion

Mean reversion strategies assume price will eventually return to an average value after deviating. Traders measure that “mean” using moving averages, VWAP, or statistical bands and then fade extremes with the expectation of reversion.

Core Elements

• Identify the mean: Choose a reference—20-period EMA, VWAP, or statistical tools like Bollinger Bands.
• Define extremes: Use z-scores, RSI, or standard deviation multiples to flag overbought/oversold conditions.
• Trigger entries: Wait for rejection candles, divergence, or lower-time-frame confirmation before fading the move.
• Plan exits: Target the mean or opposing band; scale out as price normalizes.

Risk Controls

Extended trends can stay overbought for weeks. Combine mean reversion with higher-time-frame filters, volatility regimes, and hard stops. Size positions modestly and consider time stops if price fails to revert.

Deep Dive

Most edges come from applying clear rules consistently. Expand your analysis beyond a single signal: add context from higher timeframes, recent volatility, session behavior, and catalysts. Define invalidation so a trade becomes obviously wrong fast, keeping losses small while letting winners compound.

Trader Checklist

• Higher‑timeframe bias aligns with the setup.
• Clear level or zone for entry with confluence.
• Pre‑defined stop beyond structure; 2–3R target.
• Session/liquidity supports follow‑through.
• No imminent high‑impact news unless planned.

Strategy Ideas

• Combine structure with momentum confirmation (break/close/acceptance).
• Use partials: scale out at first target; trail remainder.
• Journal results by session and pair to refine timing.

Risks and Limitations

• Thin liquidity widens spreads and distorts signals.
• False breaks around obvious levels—wait for acceptance.
• Overfitting indicators; keep the process simple and robust.

Example

Map bias on the daily chart, mark a zone, and wait on 1H for a close back above with rising participation. Enter on the retest; stop beyond the invalidation wick; target prior swing with room for extension. Record the outcome and context to iterate.