Trading Talk

Mean Reversion Index Trading Strategies

Mean reversion is an investment strategy that attempts to take advantage of the cyclical nature of markets. It seeks to capitalize on overpriced securities and buy them at a lower price, expecting that they will return to their long-term average or mean in the future.

Mean reversion strategies can be used with individual stocks, options, futures contracts, commodities, currencies, and other asset classes.

Popular mean reversion trading strategies:

  • Momentum Reversal Strategy
  • Contrarian Investing
  • Pairs Trading
  • Value Investing

Momentum Reversal Strategy

The Momentum Reversal Strategy involves buying a security after it has dropped significantly from its recent high price.

By implementing this strategy, investors hope that momentum will reverse itself and the security’s price will move back towards its long-term mean.

The most common mean reversion strategy is one in which reverts back to the daily 200 moving average.

algo trading Mean reversion MA200
US500 200 ma Daily Mean Reversal Strategy

In this episode Senior trader Matt shows how to combine multiple indicators to improve a popular mean reversion strategy, and runs a test over the past 10 years to see the portfolio results.

automated mean reversion trading

If you would like to learn more about creating automated trading strategies check out the Trading Talk series which has a new episode each week with different topics and concepts on popular automated trading strategies.

Why wait? Get started today.  Sign up for an account today with our partner broker and start creating your own automation.

Latest Episodes

Single Entry Signal

In this episode of Trading Talk, we explore a simple yet powerful single-entry algorithm designed to take advantage of market structure and economic news momentum.
We’ve built a strategy using the CCI indicator, measuring how quickly it moves from bottom to top to generate a strength-based entry signal.

Read More »

Trend Detection

In this episode we continue the multi part series adding a second trend detection function into the current build. This functions goal is to help pin point the best areas and times on the chart to look for breakouts.

Read More »