Mean Reversion Swing
IntermediateDaily chartsSwing Trading
Strategy Overview
Trading oversold bounces and overbought pullbacks to the mean.
How It Works
Mean reversion swing trading is based on the principle that prices tend to return to their average over time. This strategy identifies stocks that have moved too far from their mean (usually a moving average) and trades the reversion. It works well in ranging markets or with stocks that have predictable trading ranges. The key is identifying extreme moves that are likely to snap back, using indicators like RSI, Bollinger Bands, and standard deviation channels.
Setup Rules
- 1Stock trading in defined range
- 2Price 2+ standard deviations from 20-day MA
- 3RSI below 30 (oversold) or above 70 (overbought)
- 4No major news or fundamental changes
- 5Historical tendency to mean revert
Entry Rules
- Enter long when RSI < 30 and turning up
- Enter short when RSI > 70 and turning down
- Confirm with reversal candle pattern
- Can scale in if move continues
Exit Rules
- Target at 20-day moving average
- Or exit at opposite Bollinger Band
- Take partial profits at 50% of move
- Exit if doesn't revert within 5 days
Risk Management
- Stop beyond recent extreme
- Or use 1 ATR beyond entry
- Risk 1-1.5% per trade
- Avoid before major events
Advantages & Disadvantages
Advantages
- • High win rate strategy
- • Clear entry signals
- • Works in ranging markets
- • Mathematically based
Disadvantages
- • Losses can be large when wrong
- • Doesn't work in strong trends
- • Requires good timing
- • Can catch falling knives
Best Market Conditions
Range-bound or choppy markets without strong trends