Mean reversion

Mean reversion is the description of price moving back toward an average of its own recent values after moving away from it. As a description it is uncontroversial: any average computed from a series will be crossed by that series repeatedly, because the average is built out of it. As a claim about what price will do next it is a far larger statement, and the two senses are frequently used as though they were one. Everything in the description depends on which average is chosen. A different lookback produces a different average, a different distance from it, and therefore a different account of whether price is far from the mean at all. The phrase is also used to name a family of approaches that act on that distance, which is a separate matter from whether the distance means anything. What a chart shows is the crossings that have already happened; what it does not show is whether any of them could have been anticipated.