Mean Reversion
Respecting the tendency of some securities prices to return to their long-term mean is an essential trading strategy.
While hype can inflate markets like hot air in a balloon, prices tend to return to Earth at a moment that’s notoriously difficult to forecast. Conversely, underpriced stocks often regain the value they’ve lost. These are reasons traders can put a little faith in the statistically backed mean-reversion strategy.
Still, the strategy works only for a handful of mean-reverting asset classes that oscillate around a historical average price. Many futures markets have recently begun moving beyond their average price, but even that trend presents an intriguing opportunity for mean-reversion traders.
How so? Well, mean...
