Bets on mean reversion: buys when price is abnormally low, sells when abnormally high. Uses Bollinger Bands.
Mean Reversion is a quantitative trading strategy based on the statistical principle that cryptocurrency prices tend to revert to their historical average after extreme movements. When Bitcoin or Ethereum price moves significantly away from its moving average, the strategy anticipates a return to normal — buying bearish excesses and selling bullish excesses. This contrarian approach exploits the emotional overreaction of retail traders in crypto markets.
Calculates the standard deviation of price relative to its moving average (Bollinger Bands, z-score). When the z-score exceeds +2 or -2 (2 standard deviations), the strategy takes a contrarian position. Buys when price is too low relative to the average, sells when too high. Position closed when price reverts to mean.
Bollinger Bands (20 periods, 2σ). Statistical z-score. Simple/Exponential Moving Average (SMA/EMA). RSI for confirmation. Volume to validate reversals.
Moderate
Works very well in range-bound markets. Favorable risk/reward ratio. Statistically advantageous entry points. Strategy proven over decades in traditional finance.
Dangerous in strongly directional markets (price never reverts to mean). Risk of 'mean reversion trap' in bear markets. Requires sufficient volatility without a strong trend.
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