Mean Reversion

Mean reversion is the tendency of prices that have moved far from their recent average to move back toward it, and the trading style built on exploiting that tendency. The underlying idea is that markets overshoot: fear and greed push price to extremes that are not sustained, after which it snaps back toward a reference level such as a moving average or the middle of a range. Mean-reversion traders sell strength and buy weakness, the opposite of momentum traders, who buy strength expecting continuation.

For example, if Bitcoin normally oscillates around its 20-day moving average and suddenly spikes 15% above it in two days on no lasting catalyst, a mean-reversion trader might short the extension with a target back near the average, or wait for an oversold flush below the average to buy. Tools like Bollinger Bands and RSI are natural fits, since they measure how stretched price is from its norm.

A common misconception is that everything reverts eventually, making counter-trend trades safe; in strong crypto trends and regime changes, price can establish a new mean far from the old one, and shorting a runaway market because it is "stretched" is a classic way to take large losses. Mean reversion works best in ranging conditions with defined risk on every trade.