1. What Is Mean Reversion?
Mean reversion is a strategy based on the tendency for prices that reach extremes to return toward their average. It takes the opposite approach to momentum.
2. The Core Principle
📊 An Analogy
Stretch a rubber band, and it moves back toward its original shape.
Price surge, like a stretched band → A downward correction
Price plunge, like a stretched band → An upward rebound
3. Indicators Used
- Bollinger Bands — Upper-band touch interpreted as overbought; lower-band touch as oversold
- RSI — Above 70 interpreted as overbought; below 30 as oversold
- Z-score — Measures the distance from the average
4. Momentum vs. Mean Reversion
📊 Which Market Conditions?
Momentum: Effective during strong trends
Mean reversion: Effective in sideways or range-bound markets
AI assesses conditions automatically: Detects whether the market is trending or ranging