Profits from price returning to average after extreme moves
| Strategy Type | Mean Reversion / Counter-Trend |
| Market Outlook | Profits from price returning to average after extreme moves |
| Risk Profile | Higher risk - trading against momentum |
| Reward Profile | Quick profits (20-80 points) on reversion moves |
| Time Horizon | Hours to days (typically 1-5 days) |
| Iv Environment | N/A - Futures/Index based |
| Breakeven | Win rate × Avg win > Loss rate × Avg loss |
| Primary Instruments | FTSE 100 Futures, UK100 CFD, FTSE 250 Futures |
| Mas Compliance | MAS regulated brokers required for futures/CFD trading |
| Trading Hours | Best during London session; analysis on H1-H4 charts |
| Contract Size | FTSE 100 Futures: £10 per point; Mini: £2 per point |
| Settlement | Cash settled; overnight financing for CFDs |
| Tax Treatment | No capital gains tax for individuals in Singapore |
| Margin Requirements | Standard margin; consider overnight if holding |
| Cdp Account | Not required for futures/CFD; custody with broker |
| Singapore Relevance | Mean reversion suits analytical traders - statistical approach, defined entries, shorter holding periods |
Trading strategy based on price returning to average after extreme moves. Buy when price is significantly below average (oversold), sell when significantly above (overbought). Opposite of trend following.
Usually the 20-period moving average. Represents average/fair value price. Target for mean reversion trades. Also middle Bollinger Band or VWAP.
Best in ranging, non-trending markets. When price oscillates around mean. When extremes quickly reverse. ADX below 25 typically.
In strong trends. Price can stay 'oversold' or 'overbought' for extended periods. Trends can continue far beyond statistical extremes. Need trend filter.
Bollinger Band touch (price at 2 SD). RSI extreme (below 25 or above 75). Z-score extreme (< -2 or > +2). Reversal candlestick at extreme.
Using z-score (number of standard deviations from mean) for entry/exit. Z < -2 = Long entry. Z > +2 = Short entry. Z returns to 0 = Exit. More precise than visual band analysis.
ADX measures trend strength. ADX < 25 = Ranging (MR works). ADX > 30 = Trending (MR fails). Critical filter prevents trading MR in adverse conditions.
Only taking MR trades in trend direction. Buy oversold in uptrends. Sell overbought in downtrends. Safer than counter-trend MR. Combines trend and MR concepts.
Tighter than trend following: 1-1.5× ATR typical. Place beyond the extreme (below low for long). If extreme extends significantly, thesis is wrong. Counter-trend trades need protection.
55-70% typical (higher than trend following). Compensates for smaller average wins. In proper regime, MR signals have high probability. Lower in trending conditions.
Statistical measure: H < 0.5 = Mean reverting. H = 0.5 = Random walk. H > 0.5 = Trending. Calculate from price history. Use to identify favorable MR regimes.
Time for price to revert halfway to mean. Calculated from regression analysis. Shorter half-life = Faster reversion = Better MR conditions. Sets holding time expectations.
Adjust thresholds based on current regime. Strong MR regime: Lower z-threshold (1.75). Weak MR: Higher threshold (2.25). Adapts to changing market character automatically.
Augmented Dickey-Fuller: Tests for stationarity. If p < 0.05, series is stationary (mean reverting). Important pre-test before applying MR strategy. Validates approach.
Diversify: Multiple instruments, timeframes, entry types. Limit correlation: Treat correlated positions as combined risk. Portfolio heat: Max 3% total MR risk. Stagger entries.
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