Mean reversion is based on the assumption that price will always return (revert) to a mean (Moving Average), here’s what it means and how to trade it…
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Price reverts to the mean (Moving average), cuts through it, and RISES above it. Price then once again, reverts to the mean (Moving average), cuts through it, and FALLS below it.
- All time frames
- All Moving Averages
- All Currency pairs and most other instruments *
* Stocks – If a company goes bust and the value of that stock reduces to 0 mean reversion cannot and will not occur
The higher the time frame the longer it will take price to extend from and revert back to the mean (Moving Average).
The longer (in value) the Moving Average (mean) the more price will be able to extend away from the mean and thus, the longer it will take for price to revert back to the mean.
Mean reversion applies to ALL Moving averages on ALL time frames for ALL Currency pairs and most other instruments, see above for exceptions.
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