Reversion to the mean in trading means the same thing as in statistics: over time, the price of an asset moves above and below a moving average. Abnormal highs tend to revert to lows and vice versa.
A good example of mean reversion can be found in this chart:
The indicator symbol is SPY, and the blue line is simply a trend line drawn randomly from the bottom to the top right corner. But it shows the mean reversion:
SPY price moves in waves as it gradually rises. It does not last long in any direction before it âreturns to the previous trend.â
Even during the bear market of 2008/2009, the market saw sharp reversals, although the trend was downward:
Simply put, the market never goes in one direction without stopping. It's like the tide.
Perhaps surprisingly, most mean-reversion strategies perform best during a bear market, learn more about this below.
