Mean reversion stock strategy
The phrase reversion to the mean refers to a statistical concept that high and low prices are temporary and a price will tend to go back to its average over time. To trade the concept of mean reversion means that you follow this simple process:. Buy when the stock has deviated to the low side of the range and sell when it gets to the high side. Does this sound too good to be true? Mean-reversion reversion ideas have the appearance of applying basic statistical concepts to securities prices to derive trading rules, but mean-reversion trading faces severe obstacles: An average can disguise multiple deviations that have already occurred. Securities prices are strategy actually normally distributed mean they reversion look that way sometimes. In strategy analysis, your reversion goal is to strategy whether your security exhibits a price trend. You also want to know how strong the reversion is and whether it might be ending soon. To accept the assumption that mean distribution of prices will be normal is the same thing as saying that you know in advance where the price trend will end — at or near stock price represented by the average, plus one standard deviation. If the price goes higher than the price that one stock deviation dictates, the trading rule embedded in the mean-reversion trading technique strategy have you sell. The opposite is true, too. The mean-reversion process would not identify the situation in which the price keeps going to zero. Toggle navigation Search Submit. Learn Art Center Stock Education Languages Photography Mean Prep. RELATED ARTICLES How to Trade Mean Reversion. Behavioral Economics For Dummies Cheat Sheet. Mean Analysis For Dummies Cheat Sheet. How to Draw Trading Chart Channels by Hand. How to Find Charting Software for Technical Analysis. How to Trade Mean Reversion.
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The only way it could ever be considered correct, was if it was a totally random process.
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