Mean Reversion And Range Trading

Mean reversion strategies are based on the idea that price tends to oscillate around an average level, and that moves away from this average are more likely to reverse back toward it than to continue indefinitely — at least while a market lacks a strong trend.

How It Is Typically Applied

• Identifying a range with defined upper and lower boundaries, often using recent swing highs and lows
• Looking to sell near the upper boundary and buy near the lower boundary
• Using oscillators such as RSI to gauge whether a move is stretched relative to its recent range
• Setting tighter stops just beyond the range boundary, since a break of the range invalidates the idea