Mean Reversion Stocks

Start with Bollinger Bands - they're visual and easy to understand. Add RSI as confirmation. Bollinger Band touch + RSI below 30 (for longs) or above 70 (for shorts) is a good combination to start with.

Typically 3-10 days for swing trades. The idea is that price reverts to the mean over days to weeks. If it hasn't reverted in 10-14 days, consider exiting (time stop) as the thesis may be wrong.

It's risky. In strong trends, prices can stay extended. If you must, only take mean reversion signals in the direction of the trend (buy oversold in uptrends). Avoid fighting the trend.

The main risk is that price keeps moving against you instead of reverting. This happens in strong trends or when there's fundamental news. Always use stop losses and don't fight established trends.

Canadian banks (RY, TD, BMO, BNS), utilities (FTS, EMA), telecoms (BCE, T), and pipelines (ENB, TRP). These are stable, dividend-paying stocks that tend to trade in ranges rather than trend strongly.

Use ADX (Average Directional Index). ADX < 20 suggests range-bound (good for mean reversion). ADX > 25 suggests trending (use trend following instead). Also check if price oscillates around MAs or trends away from them.

The mean is the classic target, but you have options: 1) Exit fully at mean (conservative), 2) Exit half at mean, trail the rest, 3) Target opposite band if momentum is strong. Partial exits balance certainty with upside.

Exit before earnings or reduce position significantly. Earnings can cause gaps that invalidate the mean reversion thesis. If you're in a trade and earnings approach, consider closing regardless of P&L status.

They're conceptually similar. Bollinger Bands are visual (2 SD from 20-day MA). Z-score is a number: (Price - Mean) / SD. Z-score of 2 = price at upper Bollinger Band. Z-score allows easier quantification and systematic trading.

Risk 1-2% of capital per trade. Calculate: Position Size = Risk $ / (Entry Price - Stop Price). For counter-trend mean reversion, use the lower end (1%) since you're trading against recent momentum.

Fit an AR(1) model to the spread from mean: X(t) = α + βX(t-1) + ε. Half-life = -ln(2)/ln(β). Alternatively, from Ornstein-Uhlenbeck model: dX = θ(μ-X)dt + σdW, Half-life = ln(2)/θ. Shorter half-life = faster reversion.

Hurst exponent (H) measures persistence in time series. H < 0.5 = mean-reverting (good). H = 0.5 = random walk. H > 0.5 = trending. Calculate using rescaled range analysis or DFA. Screen stocks with H < 0.5 for mean reversion suitability.

Oversold (bullish): Buy ATM calls (30-45 DTE) or sell bull put spreads for premium. Overbought (bearish): Buy puts or sell bear call spreads. IV is often elevated at extremes, so selling premium can work. Match expiry to expected reversion time.

Define universe (TSX 60 liquid). Calculate daily: distance from MA, Z-score, RSI for each stock. Rank by Z-score extremes. Filter by ADX < 25 (range-bound). Flag when |Z| > 2 and RSI extreme. Backtest entry/exit rules on historical data.

High volatility: Wider stops (2-3 ATR), smaller positions, wait for stronger signals (Z > 2.5). Low volatility: Standard parameters but less opportunity (bands narrow). Use VIX or historical volatility to classify regime. Adjust position size inversely to volatility.