Mean reversion trading using overbought and oversold indicators

Do you want to know more about mean reversion trading and how to use overbought and oversold indicators to trade it? Watch our latest video to find out how to profitably use this mean reversion trading strategy.

Mean reversion trading – A simple explanation

Mean reversion, which is one of the most common ways to analyze a market, can be done through several different indicators. Simply put, you are trying to find a market that is a bit overbought or oversold, and treating it with the expectation that we will see markets return feel that would be considered normal. After all, markets try to find some type of normalcy, a lot of times represented in the form of a moving average. And as such, a lot of the mean reversion techniques involve moving averages such as with the Bollinger Bands.

We also have mean reversion using overbought and oversold indicators with such things as Stochastic Oscillators, MACD, and other indicators that are quite often presented on the bottom of your chart. Essentially, they all work the same, they simply signal when markets may have been a little over exuberant, and as a result could very well turn things back around and try to find will be a little bit more in the way of normalcy.

This doesn’t mean that markets always return to the mean, just that they typically will. After all, quite often the market will do so – but there are some ‘black swan events’ that can happen. This is rare, but it does happen. In other words, it is like any other type of trading, it’s not 100%, but it plays the averages like most traders tend to. Having said that, it makes sense that more often than not, you will ‘win’, and over the longer-term, those ‘wins’ should outnumber all of your loses.