The Simplest Mean Reversion Trading Strategy
Creating a Very Basic Mean Reversion Strategy in Python
Mean reversion is a type of contrarian trading where the trader expects the price to return to some form of equilibrium which is generally measured by a mean or another central tendency statistic. This article discusses a really simple mean reversion trading strategy.
Quick Introduction to Mean Reversion
Markets generally move in irregular cycles. This means that, when we look at the charts, we tend to see ups, downs, and relatively flat phases. The key to trading and investing is to be able to determine the changes in these phases which are also called market regimes.
Mean reversion can be in the form of a moving average where if the market goes too far from it, it is likely to go back to its area. The following Figure illustrates the example.
But how do we measure ‘too far’? We will try a very simple way based only on the position of the price relative to the moving average.
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