StrategyIntermediate#Technical Analysis#Quantitative
Mean Reversion
M
Definition
A theory that prices tend to return to their historical average over time, making extreme deviations potential trading opportunities.
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Concept Diagram
Key Takeaways
1
Prices tend to return to historical averages after extreme deviations.
2
Bollinger Bands and RSI are primary tools for identifying mean reversion setups.
3
Works best in range-bound markets; fails in strong trending markets.
4
Crypto is trendier than traditional markets, making mean reversion less reliable.
Practical Example
BTC's 200-day MA is $85,000. Price spikes to $105,000 (23% premium). Historically, BTC reverts to within 5% of its 200 MA within 60-90 days. A mean reversion trader shorts at $105,000 targeting $90,000.
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