mean-reversion
Mean Reversion
Mean reversion is the statistical tendency for prices, spreads, or other financial variables to return toward a long-run average after deviating from it. A mean-reverting series overshoots its mean, then corrects back -- creating predictable oscillations that can be traded.
When Mean Reversion Works
- Ranging markets: Sideways price action with clear support/resistance
- Pairs spreads: Spread between cointegrated assets reverts to equilibrium
- Oversold/overbought extremes: RSI, Bollinger Band, or z-score extremes in stationary series
- Funding rate arbitrage: Perpetual funding rates revert to baseline
- Stablecoin depegs: Classic mean-reversion opportunity (peg = known mean)
- Post-dump recovery: Brief mean-reversion windows after initial PumpFun dumps
When Mean Reversion Fails
- Strong trending markets (most crypto most of the time)
- Regime changes: what was stationary becomes non-stationary
- Structural breaks: token migration, protocol upgrade, delistings
- Low liquidity: wide spreads consume mean-reversion profits
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