Mean Reversion

09/07/2021 08:00 AM By Matt Ratliff

Let's Talk Strategies


One of my most consistently profitable active investment strategies is based on the concept of "mean reversion". 


The goal of mean reversion is to profit by taking a counter-trend position when the market is "stretched unusually far" from recent prices. 


A simple way to think about it is to imagine a rubber band:  if you place your fingers on the ends and pull down in the middle and release it, it will snap back to its original place.  That same concept applies to the majority of extreme moves in the markets. A mean reversion strategy buys (or sells) when the market drops (or rallies) and and targets ta return towards the area where the market was when it began its big move.  These strategies often have some of the strongest win rates and can be quite effective at taking advantage of both trend-following and counter-trend moves.

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Matt Ratliff