StrategyIntermediate#Technical Analysis#Quantitative
Mean Reversion
M
Definition
A hypothesis that a selected measure may move toward a chosen reference level after a deviation. It depends on the asset, period, calculation, market regime, and rule; it is not a guarantee that price will return or an automatic trading opportunity.
Source reviewed
- FINRA: What Is Market Timing? opens in a new tab
Supports: Explains that technical analysis is used in attempts to anticipate short-term price movements and that prediction-based active trading has risks and costs.
- SEC Investor Bulletin: Performance Claims opens in a new tab
Supports: Explains that performance information depends on assumptions and past performance does not necessarily predict future results.
Concept Diagram
Key Takeaways
1
Mean reversion is a hypothesis about a defined measure and reference, not a promise that price must return
2
Moving averages, bands, and oscillators transform past data; their outputs depend on calculation choices
3
Test a stated rule across changed regimes, costs, execution constraints, and out-of-sample data including failed periods
4
A signal is research context, not a forecast, position instruction, or evidence that a historical relationship will persist
Practical Example
A rule marks an asset as far from its 200-day average. A reviewer records the exchange, time zone, data source, calculation, costs, liquidity, and invalidation condition, then tests the rule across periods that include trends and gaps. They do not assume the average is a target or enter a short solely because the distance is large.
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Related Terms
Trading
Grid TradingA rule-based order setup that places buy and sell instructions at predefined price levels. It automates order placement; it does not guarantee a profit, avoid directional exposure, or make a range persist.
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Risk-Reward RatioA planned comparison between a trade's stated loss threshold and target. It is a scenario calculation, not the probability of either outcome, a guaranteed payout, or evidence that a trade is favorable.
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Position SizingThe process of setting an intended exposure for a position. It requires explicit assumptions about price, instrument, leverage, liquidity, costs, correlations, and loss tolerance; no universal percentage or formula is suitable for every account or product.
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