What is mean reversion in trading?
In one line: Mean reversion is the idea that after price stretches far from its average, it tends to drift back toward that average over time.
A simple example
Think of a rubber band. Stretch it far and it wants to snap back.
Say a stock's 20-day average price is 50. A fast drop takes it to 45. That's 10% below the average. A mean-reversion trader asks: "Is this stretch too far? Will it drift back toward 50?"
If it does, the move from 45 back toward 50 is the trade idea. If it doesn't, the stop gets hit. Both are normal.
The "mean" is just the average. Most people use a Moving average, a VWAP line, or the middle of Bollinger Bands.
Why it matters
Markets spend a lot of time moving sideways. In a sideways market, prices often swing from one edge back to the middle. Mean reversion is the name for trading that swing.
It's the opposite style to trend following, which bets the move keeps going. Neither is "right." They suit different market moods. We compare them side by side in trend following vs mean reversion.
A common mistake
Fading a strong Trend because price "looks too high." In a real trend, price can stay far from its average for weeks. "Too far" can get further.
Check the bigger chart first. Are the last turning points making higher highs and higher lows? Then the stretch may just be the trend doing its job. Mean reversion fits best in a range, with clear Support and Resistance. More in range trading explained.
Before a mean-reversion trade, name the average you expect price to return to, and where you're wrong if it doesn't.
Questions
Does mean reversion always work?
No. Prices can keep moving away from the average, especially in a strong trend or after big news. That's why a stop comes first.
What indicators are used for mean reversion?
Common ones are moving averages, Bollinger Bands, VWAP and RSI. They all measure how far price has stretched from "normal."
Is mean reversion good for beginners?
It can be practiced like any style. The key is spotting whether the market is trending or ranging first, then sizing so one wrong trade stays small.
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