Mean Reversion
The tendency of price to return toward its historical average after an extreme deviation — the foundation of counter-trend trading.
Mean reversion is the statistical observation that extreme price moves tend to correct back toward a central value — whether that is a moving average, VWAP, or a long-run fair value. Markets oscillate between overextension and equilibrium.
Mean reversion strategies fade extended moves and profit when price snaps back. The risk: in trending markets, mean reversion signals produce sustained losses. The classic mistake is fading a breakout early in a new trend, mistaking momentum for overextension.