Mean Reversion Trading Systems
How to fade extreme overextensions using RSI, Bollinger Bands, and statistical z-scores.
Strategy Overview
Mean reversion assumes that price will eventually return to its historical average. This involves fading extremes—buying when assets are statistically oversold and selling when overbought.
Execution Mechanics
Using standard deviations (Z-scores) or indicators like RSI, traders systematically scale into positions as they stretch further from the mean, banking on an elastic snapback.
⚠️ Risks & Considerations
Trending markets will destroy mean reversion strategies. A stock can stay 'oversold' all the way to zero.
Regime Applicability
- Best Environment: Ranging, choppy, or sideways markets.
- Worst Environment: Strong directional trend regimes (bull or bear).