Mean Reversion
The tendency of price to return toward its historical average after an extreme deviation — the foundation of counter-trend trading.
Mean reversion is the statistical observation that extreme price moves tend to correct back toward a central value — whether that is a moving average, VWAP, or a long-run fair value. Markets oscillate between overextension and equilibrium.
Mean reversion strategies fade extended moves and profit when price snaps back. The risk: in trending markets, mean reversion signals produce sustained losses. The classic mistake is fading a breakout early in a new trend, mistaking momentum for overextension.
Related Terms
Divergence
Price making a new high/low while a momentum indicator fails to confirm — a warning that the current move may be losing steam.
IntermediateMoving Average
The average closing price over N periods, updated each bar — smooths noise and exposes the underlying trend direction.
BeginnerReversal
A sustained change in the direction of the prevailing trend, not just a temporary counter-move.
IntermediateTrend Following
A strategy that enters in the direction of the established trend and rides it until structural evidence of a reversal appears.
IntermediateVWAP
The average price weighted by volume traded throughout the session — the institutional benchmark for execution quality.
Intermediate