Mean Reversion Philosophy

The underlying principle of Mean Reversion trading is that when stocks rapidly move away from their mean price they will revert back to that mean in the short term.  If a stock falls rapidly in price then it is likely to rally in the short term and if a stock rises rapidly in price then it is likely to fall in the short term.  To trade these price movements, we will generally identify a stock that has fallen in price and then place an order below the current market.  This means the price of the stock needs to fall even further for us to enter the trade.  An inevitable consequence of trading a mean reversion system is that you can experience large intra-trade draw-down.  You will also get a lot of signals when the market has a rapid fall in price or a rapid rise in price.  The management of the large number of signals is discussed here.