Mean Reversion Stocks

Use your broker's stock screener or TradingView to scan for RSI below 30 and/or price below lower Bollinger Band. Most Australian broker platforms (CommSec, nabtrade) have built-in screeners. Focus on ASX 200 stocks for liquidity.

This is why we use stop losses. If the stock falls 5% below your entry, exit to limit losses. Not every oversold stock bounces - the strategy works over many trades, not every trade. Accept small losses as part of the process.

Risk 2-3% of your portfolio per trade. With a 5% stop loss, this means position size is approximately 40-60% of portfolio value per trade. For a A$30,000 portfolio risking 2%, that is A$600 risk, which equals A$12,000 position with 5% stop.

No - averaging down increases risk. If your stop is hit, exit and reassess. Averaging down is the path to large losses. Trust your original analysis and respect the stop loss.

Key differences: 1) Check news - no company-specific bad news for mean reversion. 2) Check trend - above 200-day MA is safer. 3) Check sector - if only this stock falling (others flat), may be falling knife. 4) Check volume - capitulation volume is bullish.

RSI(2) is more aggressive with shorter holding periods (2-5 days) and higher win rates but smaller gains. RSI(14) is more conservative with longer holding periods (5-10 days) and fewer signals. Many traders use RSI(2) for entry, RSI(14) for confirmation.

Avoid entering mean reversion trades 5 days before earnings - the oversold condition may be justified by expectations. If already holding, consider exiting before earnings to avoid gap risk. Earnings introduce fundamental uncertainty.

Generally no - during corrections, oversold stocks often become more oversold. When A-VIX spikes above 25-30, reduce mean reversion activity significantly. Mean reversion thrives in low-volatility range-bound markets, not during panics.

Calculate 20-day mean and standard deviation of closing prices. Z-score = (Current Price - Mean) / StdDev. Enter when z-score falls below -2. Exit when z-score returns to 0. This pure statistical approach complements RSI-based methods.

Random Forest and Gradient Boosting perform well for predicting bounce probability. Features should include technical (RSI, z-score, volume ratio), fundamental (sector relative performance), and macro (A-VIX, AUD). Use 5-year walk-forward validation.

Risk the same dollar amount as you would with spot (e.g., 2% of portfolio). For calls, this is your premium budget. Choose delta 0.30-0.40 for balance of cost and leverage. DTE 30-45 days gives time for bounce to develop.

A-VIX < 15: Full exposure, aggressive entries. A-VIX 15-20: Normal exposure. A-VIX 20-25: Reduce position sizes 25%. A-VIX 25-30: Reduce 50%, tighter stops. A-VIX > 30: Pause mean reversion, wait for volatility to subside.