Mean reversion strategy in stock trading means that stock prices tend to return to their average or normal level over time. If a stock moves too high or too low from its average price, traders expect it to come back to that average. This strategy is used to buy undervalued stocks and sell overvalued ones based on historical price trends.
How Does Mean Reversion Work in Trading?
Mean reversion works by tracking the average price of a stock over a specific period, like 20 or 50 days. When the price goes too far above or below this average, traders expect it to move back towards the average. This strategy helps identify buy or sell opportunities when prices are too high or too low compared to their normal range.
What Indicators Are Used in Mean Reversion Strategy?
Common indicators include moving averages (like 20-day or 50-day), Bollinger Bands, and Relative Strength Index (RSI). These tools help traders spot when a stock is too far from its mean price. For example, if RSI is above 70, the stock may be overbought; if it's below 30, it may be oversold. This helps traders decide when to enter or exit trades.
Is Mean Reversion Strategy Suitable for Beginners?
Yes, mean reversion can be simple to understand, which makes it good for beginners. But it still needs basic knowledge of charts, indicators, and discipline to follow the rules. New traders should practice this strategy with virtual accounts or small amounts before investing more. Using tools like Angel One can also make it easier to track averages and indicators.
What Are the Benefits of Mean Reversion Strategy?
This strategy helps traders find clear entry and exit points based on historical patterns. It avoids emotional trading and focuses on logic and data. It works well in stable and sideways markets where prices bounce around a mean. Traders can use it for short-term profits with low risk if used with proper stop-losses.
What Are the Risks of Mean Reversion Strategy?
Sometimes prices do not return to the mean quickly, or may move further away due to strong trends. In such cases, traders may face losses if they enter too early. It is risky during market breakouts or sudden news events. That’s why using stop-loss and proper risk management is very important in this strategy.
Is Mean Reversion Strategy Popular in India?
Yes, many Indian traders use mean reversion in stocks, Nifty, and Bank Nifty trading. It is also used in intraday and swing trading strategies. With access to better tools and charts on platforms like Angel One, more retail investors are adopting it. It works well in Indian markets, especially during sideways or range-bound phases.
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