What is Mean reversion?
The tendency of a stretched price to move back toward its recent average.
When a price runs far from its average, buying or selling pressure often brings it back. Volatility itself is mean-reverting, which is why calm periods cluster and storms do too.
Mean reversion and momentum pull in opposite directions at different horizons. A good model keeps both as features and lets the data decide the mix.
Related terms
- MomentumTechnical analysis
The speed of recent price change; strong momentum tends to persist over short horizons.
- Moving averageTechnical analysis
The average price over the last N periods, redrawn each period, used as a trend baseline.
- VolatilityTechnical analysis
How much a price swings, usually annualised from recent returns; the core input to any range.