Strategy Methodology

Mean Reversion

A strategy that identifies prices deviating from a historical average and trades in the direction of the expected return to that average.

Mean reversion is the counterpart to trend following. Where momentum assumes persistence, mean reversion assumes correction. An asset that has moved significantly above or below its historical average is expected to revert — and the strategy trades that expectation.

The botwir3 mean reversion module measures deviation from a configurable baseline (moving average, VWAP, or fair value estimate) and proposes entries when the deviation exceeds a threshold. The gate validates that the proposed position falls within the configured tolerance band.

Mean reversion works well in range-bound markets and poorly in trending ones. The same asset can be a trend trade in one regime and a mean reversion trade in another. The user configures the lookback, threshold, and exit conditions. The module proposes. The gate validates. The user is responsible for selecting the appropriate strategy for the market conditions.

Sources

Poterba, J. M. & Summers, L. H. (1988). “Mean Reversion in Stock Prices: Evidence and Implications.” Journal of Financial Economics, 22(1), 27–59.Early evidence of mean-reverting behavior in aggregate stock returns.
Lo, A. W. & MacKinlay, A. C. (1988). “Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test.” The Review of Financial Studies, 1(1), 41–66.Demonstrated serial correlation in weekly returns, consistent with mean reversion.

Used in

◎Mean Reversion module — builder

See this in action

→ coinbase→ kraken→ alpaca→ tcgplayer

Related

→ Trend Following / Momentum→ Volatility→ Spread→ Edge
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