Forex glossary
Mean Reversion
Mean reversion is a model property or strategy assumption that deviations of a selected variable from a reference level tend to diminish. The variable may be price, a spread or a model residual. Distance from a moving average alone establishes neither that property nor the timing of a return.
Illustrative example
How does it work in practice?
Assume a model has a fixed 100 USD reference and price is 106 USD. A strategy considers a six-dollar return; if the average instead moves up to 106, deviation disappears without a price decline.
A case to work through
The average catches up
Hypothetically, price stays at 120 while its average moves from 110 to 116.
- Deviation falls from 10 to 4 without a price decline.
- Approaching the average alone does not establish that a sell scenario with a price target succeeded.
What follows? Record both quantities' changes rather than only their distance.
Example boundary: The model property and return horizon need separate assessment.
A useful distinction
Mean Reversion / Moving Average (MA)
Mean reversion is an assumption about deviations; a moving average is a changing statistic rather than proof of that assumption.
Check your understanding
Calculate deviation changes against a moving reference.
Show the answer and explanation
By 4, from 6 to 2
Price is unchanged; the reference moves.
Volatility and transformed data
Step 4 / 9 · 0 / 9 reviewed
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Read the fuller explanation
Related terms
Sources and documentation
- John Bollinger – band rules
Band touches, historical dispersion and normalized BandWidth; touches alone are not orders.
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