Mean reversion is a financial theory suggesting that asset prices and returns eventually return to their long-term average or mean level. This concept is based on the idea that extreme price movements will be followed by opposite movements, leading the prices back toward a historical average. In many markets, traders use this approach to identify potential reversal points in trends, especially after significant price fluctuations. By analyzing price patterns and statistical measures, traders aim to determine when an asset may be overpriced or underpriced relative to its historical norm. Mean reversion strategies often involve the use of statistical tools and careful analysis to make informed trading decisions.
