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Investment
Mean Reversion
A strategy that bets the price will move back toward its average after moving too far in one direction.
Mean reversion uses indicators like Bollinger Bands, RSI, or standard deviation. It is the opposite of trend following. Combining both strategies (trend in strong markets, mean reversion in choppy ones) is common among advanced traders.
It's betting that a rubber band stretched too far will snap back to the middle.
Real world: When a stock becomes extremely overbought on RSI (above 80), mean-reversion traders sell expecting the price to fall back toward its moving average. It works best in sideways or ranging markets.
💡 Mean reversion profits when the market is calm and overextended.