Home
IU

What is mean-reversion?

Mean reversion is the idea that the price of an asset will eventually move back towards its average or “mean” value over time. This concept is based on the idea that prices tend to fluctuate around a central or average value, and that deviations from this value are usually temporary.

In financial markets, mean reversion is often used to describe the tendency of an asset’s price to move back towards its long-term average price after experiencing significant price movements. For example, if a stock has had a sustained period of price appreciation, it may be considered overvalued and likely to experience mean reversion as the price eventually falls back towards its long-term average. On the other hand, if a stock has experienced a prolonged period of price decline, it may be considered undervalued and likely to experience mean reversion as the price eventually rises back towards its long-term average.

Mean reversion can be used as a trading strategy by buying an asset that is undervalued or selling an asset that is overvalued, with the expectation that the price will eventually revert back towards its long-term average. This strategy can be based on technical analysis, which uses past price and volume data to identify trends and patterns, or on fundamental analysis, which looks at a company’s financial health and industry trends to determine the intrinsic value of its stock.

Overall, mean reversion is a useful concept for traders and investors to understand, as it can provide insight into the likely direction of an asset’s price and inform trading decisions.

“If you invest and don’t diversify, you’re literally throwing out money. People don’t realize that diversification is beneficial even if it reduces your return. Why? Because it reduces your risk even more. Therefore, if you diversify and then use margin to increase your leverage to a risk level equivalent to that of a nondiversified position, your return will probably be greater.” – Jeff Yass

sc name=”fma-cta”]

BLOOMBERG GLOBAL NEWS

Bloomberg video news feed with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED

RBA ECONOMIC UPDATES

Periodic updates on the Australian economy, direct from the RBA, with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED

US FEDERAL RESERVE UPDATES

Bloomberg News focussed upon the Federal Reserve, with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED

FX/GLOBAL BRIEFS

Brief global updates with a focus upon currencies, with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED

ASX MARKET UPDATES

ASX-focussed updates, with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED

BLOOMBERG BRIEFS

Global briefs from Bloomberg with live charts, watchlists & fundamentals
Audio/video feed with live charts, watchlists & fundamentals
CHARTS + FEED