What is Mean Reversion Trading?

Mean reversion trading is a strategy that utilizes statistical principles for trading. This strategy assumes that market prices always fluctuate around their mean, and when prices deviate from the mean, there will be a regression, which generates trading opportunities. Common mean reversion trading strategies include pairs trading and cointegration trading.

Pairs trading is a strategy that trades using the price difference between two or more related securities. In this strategy, traders usually select two or more related securities, determine trading signals by calculating the price difference between them, and observe the degree of deviation from the mean. When the price difference deviates from the mean, a trading signal is generated. Traders can buy low-priced securities and sell high-priced securities, wait for the price difference to return to the mean, and profit.

Cointegration trading is a strategy that trades using the cointegration relationship between two or more related securities. In this strategy, traders usually select two or more related securities, determine trading signals by calculating the cointegration relationship between them. The cointegration relationship refers to the long-term equilibrium relationship between two or more securities, which helps traders determine trading signals when prices deviate from the equilibrium relationship. When prices deviate from the equilibrium relationship, a trading signal is generated. Traders can buy low-priced securities and sell high-priced securities, wait for prices to return to the equilibrium relationship, and profit.

The advantage of mean reversion trading is that it helps traders profit when market prices deviate from the mean. However, mean reversion trading also has its risks, such as sudden changes in market trends, large deviations from the mean, etc., which may cause traders to lose money. Therefore, when choosing mean reversion trading strategies, traders need to consider market risks and their actual situation, and develop corresponding risk control and capital management strategies.