Mean Reversion
a.k.a. Reversion to the mean
The idea that prices stretched far from their average tend to snap back toward it.
Mean reversion is the rubber-band theory of markets. Pull price far away from its average and the band gets tight; sooner or later it tends to snap back. Mean-reversion traders hunt for those overstretched moments: they sell when price is far above its moving average or upper Bollinger Band and buy when it is far below.
It works best in ranges. In a strong trend the band can keep stretching for far longer than your account can stay solvent, which is why mean reversion and trend following are almost opposite philosophies.
Fading a powerful trend because it "looks too high". Overbought can get a lot more overbought.
Keep this word for good
Your free Private Swap Lounge saves the terms you’ve learned and quizzes you on them. Portal under construction. Expected delivery date is December 01, 2026.