Mean reversion works best in:

Range-bound markets. Mean reversion relies on price returning to average — this only works in ranging conditions.

Mean Reversion

Trading the rubber band effect

Mean reversion is based on the principle that price tends to return to its average over time. When price stretches too far from the mean, it snaps back.

Tools for mean reversion: - Bollinger Bands: Trade touches of outer bands - RSI extremes: Buy oversold, sell overbought (in ranges) - Moving average deviation: Trade return to 20 EMA

Best conditions: - Range-bound markets (not trending) - After extreme moves without fundamental catalyst - When volatility indicators show overextension

⚠️ Mean reversion fails in trending markets. Always check if the market is ranging before applying this strategy.

Pro tip: Combine RSI oversold with Bollinger Band lower touch for high-probability mean reversion trades.

Common mistake: Applying mean reversion in a strong trend. Better: Mean reversion only works in ranging markets. In trends, use trend-following strategies..

Key takeaways

Price tends to return to its average
Works best in range-bound markets
Use Bollinger Bands and RSI for entries
Fails in strong trending markets

Quiz

Mean reversion works best in: Answer: Range-bound markets. Mean reversion relies on price returning to average — this only works in ranging conditions.

Educational content, not financial advice.