The stock market obviously doesn’t move in a straight line. It goes up, it pulls back, it rallies, it corrects.
This back-and-forth movement isn’t random — it’s a fundamental principle called mean reversion.
And if you understand how it works, you can use it to your advantage.
The Market Always Snaps Back
Mean reversion is the idea that price movements tend to revert to their average over time. When stocks get too stretched in one direction, they snap back. That’s why the market rarely moves more than 1% in a day without a catalyst — because it’s constantly self-correcting.
This happens on every time frame. It’s not just a daily or weekly phenomenon. It happens on a minute-by-minute basis. The S&P 500 might rally for several days, then pull back before continuing higher.
That’s mean reversion in action.
And this isn’t just theory — it’s the reason many trading strategies work. If you know that extreme moves are likely to revert, you can position yourself accordingly.
Why Mean Reversion Matters for Your Trades
Understanding mean reversion helps traders avoid chasing momentum at the wrong time. When a stock or index is stretched far above its average, odds are it’s due for a pullback. When it’s oversold, a bounce is more likely.
This is why experienced traders don’t panic when markets drop.
They know pullbacks are part of the process — and that markets eventually revert to the mean. It’s also why strategies like selling options work. If you’re betting that the market won’t move too far in one direction, you’re leaning on mean reversion.
And here’s the kicker: The longer an asset trades, the more likely it is to follow mean reversion. Even Bitcoin — which started as a highly volatile, non-mean-reverting asset — has begun to behave more like a traditional market.
That’s why the smartest traders don’t just look at trends — they watch for reversion opportunities. Because in a market that constantly corrects itself, extremes never last forever.
Kane Shieh
Kane Shieh Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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