Mean Reversion Strategy

Overview

Mean reversion strategies assume that price will return to its average after becoming overextended. This approach works best in range-bound or slow-moving markets.

When It Works Best

Mean reversion performs well in sideways markets, low-volatility environments, and during consolidation phases.

Entry Rules

• Identify overbought/oversold conditions using RSI, Stochastics, or Bollinger Bands.
• Enter when price rejects extremes and begins moving back toward the mean.
• Confirm with volume slowdown or reversal candles.

Exit Rules

• Target the middle of the range or the moving average.
• Place stop-loss outside the volatility band.
• Exit early if momentum continues strongly against the trade.

Common Mistakes

• Trying mean reversion in strong trending markets.
• Entering before confirmation of reversal.
• Ignoring volatility spikes.