- Strategies & Applications Behind The 50-Day EMA (INTC, AAPL)
- Mean Reversion Trading Strategy with a Sneaky Secret
For example, new information may become available that permanently affects the long-term valuation of an underlying stock.
Strategies & Applications Behind The 50-Day EMA (INTC, AAPL)
In the case of bankruptcy, it may cease to trade completely and never recover to its former historical average. In finance, the term "mean reversion" has a different meaning from "return or regression to the mean" in statistics. Jeremy Siegel uses the term "return to the mean" to describe a general principle, a financial time series in which "returns can be very unstable in the short run but very stable in the long run.
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From Wikipedia, the free encyclopedia. For other uses, see Mean reversion disambiguation. World Scientific. ISBN Financial markets.
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External Relative Strength. One simple way to look for a reversion to the mean trade signal is by setting visual deviations around prices using technical indicators like Bollinger Bands or Keltner Channels that usually measure the distance from the day moving average in standard deviations of price.
When a market drops dramatically or rises parabolically three or four deviations from the day moving average the odds are that it will revert back to that average in days or weeks the majority of time. Of course this does not always happen as markets rotate from ranges to trends, and can go farther than anyone thought possible so you must always use a stop loss for the times when a trend continues and does not revert.
One strategy is to buy dips to the lower 3rd standard deviation Keltner Channel or sell rallies short to the upper 3rd standard deviation Keltner Channel and set a stop loss if price closes back outside your entry channel signal.
Mean Reversion Trading Strategy with a Sneaky Secret
Your profit target could be back to the day moving average. A mean reversion entry is taking a trade that is at short term extreme prices that has a good chance of returning to more normal long term price metrics. Chart Courtesy of TrendSpider.