Strategy
Mean Reversion
Quick Definition
A theory that asset prices tend to return to their average over time. Mean reversion traders buy oversold assets expecting a bounce and sell overbought assets expecting a pullback.
Example
The mean reversion strategy worked when the stock bounced from oversold RSI levels.
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Related Terms
Overbought
When an asset has risen too fast and may be due for a pullback. Often measured by RSI above 70. Doesn't mean sell immediately—strong trends stay overbought for weeks.
Oversold
When an asset has fallen too fast and may be due for a bounce. Often measured by RSI below 30. Can signal a buying opportunity, but falling knives can keep falling.
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