Mean reversion is a concept in trading based on prices eventually returning to their mean or average level after a period of divergence or departure from the historical mean.
Traders deploying mean reversion techniques typically wait for assets to diverge significantly from their mean values and then place trades on the assumption the price will return to the mean at some point in the future- this is also known as re-coupling or convergence.
Chart showing the EURUSD displaying mean reversion tendencies over the course of three months.
There are several mean reversion based trading systems based which use Median Grids (grids), Bollinger Bands or Keltner Channels as entry and exit methods. It is important to be aware of fundamental factors when deploying mean reversion trading techniques as a sustained move away from an assets historical mean could be driven by fundamental factors which may create extreme divergence.