Mean Reversion

Mean reversion is the statistical tendency for prices, spreads, or other financial variables to return toward a long-run average after deviating from it. A mean-reverting series overshoots its mean, then corrects back -- creating predictable oscillations that can be traded.

When Mean Reversion Works

• Ranging markets: Sideways price action with clear support/resistance
• Pairs spreads: Spread between cointegrated assets reverts to equilibrium
• Oversold/overbought extremes: RSI, Bollinger Band, or z-score extremes in stationary series
• Funding rate arbitrage: Perpetual funding rates revert to baseline
• Stablecoin depegs: Classic mean-reversion opportunity (peg = known mean)
• Post-dump recovery: Brief mean-reversion windows after initial PumpFun dumps

When Mean Reversion Fails

• Strong trending markets (most crypto most of the time)
• Regime changes: what was stationary becomes non-stationary
• Structural breaks: token migration, protocol upgrade, delistings
• Low liquidity: wide spreads consume mean-reversion profits