Glossary
Mean reversion
The tendency of extreme prices to drift back toward an average. Over some horizons recent losers beat recent winners — the reason shorting weak stocks backfired in our study.
In plain terms
Markets show momentum and mean reversion at the same time, on different clocks: days-to-weeks tends to revert, months tend to trend, and multi-year extremes revert again. Get the horizon wrong and you trade exactly backwards.
This horizon-dependence is why naive 'sell the losers, buy the winners' rules are fragile. In our tests, shorting recently weak stocks lost money precisely because short-horizon reversion kept snapping them back.
Related terms
Educational definitions only. Not investment advice.