Mean Reversion and Compression Models

Not every market is built to trend.

Some days are defined by excess – price stretches too far, too fast, and emotion replaces efficiency.

Others are defined by balance – price rotates, compresses, and goes nowhere for hours.

Mean reversion and compression trading isn’t about calling tops or bottoms.

It’s about recognising when the market has become inefficient and positioning for a return to value – calmly, selectively, and with modest expectations.

What “The Mean” Really Represents

1. Overextended Markets

These occur after strong, emotional moves where price efficiency breaks down. You’re not betting on a full reversal – just a pause, unwind, or pullback as the market catches its breath.
The focus is short-term rebalancing, not trend change.

2. Range-Bound Markets

These appear far more often. Breakouts fail, sell-offs stall, and price rotates from one side of a range to the other.

Here, patience is the edge. You wait for price to reach extremes, show signs of rejection, and then rotate back toward value. The middle of the range offers nothing — that’s where edge disappears.

Different environment. Different expectations. Same principle.

Mindset and Expectations Matter More Than Entries

Mean reversion trading only works when expectations are realistic.
You’re not hunting home runs. You’re collecting inefficiency.

That means:

  • Strict stop-losses

  • Clear invalidation

  • Fast decision-making when the market changes its mind

  • Getting paid and stepping aside

A mean reversion trade that doesn’t work tends to fail quickly – which is exactly how it should behave. When it doesn’t, it’s usually a sign the environment has shifted.

Final Thoughts: Respect Context or Stand Aside

Mean reversion is powerful when conditions align – and unforgiving when they don’t.

Many trading mistakes don’t come from bad ideas, but from good ideas used in the wrong environment.

Ask better questions before acting:

  • Is price still progressing or stalling?

  • Is volatility expanding or compressing?

  • Is participation increasing or fading?

  • Is the market accepting these prices – or rejecting them?

When context is clear, mean reversion becomes a precise, disciplined tool.

When it isn’t, the most professional trade is no trade at all.