Mean Reversion Trading: How to Trade Price Snap-Backs
When price stretches too far from average, it tends to snap back. Learn to identify overextended moves and trade the high-probability reversion to the mean.
- Mean reversion trades bet that price will return to average after extending too far—statistically likely at extremes.
- At 3 standard deviations from mean, reversion probability is very high—but confirm with RSI/volume exhaustion.
- Thrive detects extreme deviations from VWAP and moving averages and alerts you to snap-back setups.
See Mean Reversion in Action
Click through different deviation scenarios to understand reversion probability:
Standard Deviation from VWAP
Deviation
-3σ
RSI
18
Reversion Probability
HIGH
Price is 3 standard deviations below VWAP—extremely oversold. Statistically, price spends very little time this extended. Mean reversion probability is high. RSI at 18 confirms extreme selling exhaustion.
High-probability long for mean reversion trade. Enter with stop below the extreme low. Target: VWAP or -1σ band. Don't hold for trend—this is a snap-back trade. Scale out at each band.
What Is Mean Reversion?
Mean reversion is the statistical tendency for price to return to its average over time. When price moves far from the mean (overextended), it's statistically likely to revert. Traders exploit this by fading extreme moves.
The logic: markets oscillate around fair value. Panic selling pushes price below fair value → eventual bounce. FOMO buying pushes price above fair value → eventual pullback. Mean reversion captures these corrections.
Standard Deviation Bands
Standard deviation measures how far price has moved from the mean. More deviations = more extreme = higher reversion probability.
Deviation Zones
- Within 1σ: Normal range. ~68% of price action. No setup.
- 1-2σ: Extended. ~27% of action. Moderate reversion probability.
- 2-3σ: Very extended. ~4% of action. High reversion probability.
- Beyond 3σ: Extreme. ~0.3% of action. Very high reversion probability.
Bollinger Bands are a common visualization: middle band = mean (usually 20 SMA), outer bands = ±2σ.
| Deviation | Extension | Reversion Probability | Trading Approach |
|---|---|---|---|
| ±1σ | Normal | Low (50%) | No trade—wait for extension |
| ±2σ | Extended | Medium (70%) | Look for confirmation |
| ±3σ | Extreme | High (90%+) | High conviction entry |
| At mean | Fair value | N/A | No reversion setup |
VWAP Reversion
VWAP (Volume Weighted Average Price) is the gold standard for intraday mean reversion. It represents the average price weighted by volume—true fair value for the session.
Why VWAP Works
- Institutions benchmark to VWAP—they want to trade at or better than average
- Significant deviation from VWAP attracts institutional interest
- Self-fulfilling: so many traders watch VWAP that reversion often occurs
VWAP Reversion Trades
Long setup: price 2-3σ below VWAP with RSI oversold. Enter on reversal confirmation. Target VWAP. Stop below extreme low. Short setup: mirror for overbought.
Related reading: VWAP Trading Strategies
Timing Mean Reversion Entries
Deviation alone isn't enough—you need confirmation that the move is exhausting.
Entry Confirmation Signals
- RSI divergence: Price makes new extreme but RSI doesn't—momentum fading
- Volume climax: Spike in volume at the extreme often marks exhaustion
- Rejection candle: Hammer, doji, or engulfing at the extreme
- Lower timeframe structure: LTF shows reversal pattern
Stop Placement
Stop beyond the extreme—if price continues rather than reverting, you're wrong. Accept the loss. Typically 0.5-1σ beyond your entry level.
Mean Reversion Targets
Mean reversion targets are conservative—you're trading for the snap-back, not a trend.
- First target: -1σ level (if entered at -3σ)
- Second target: Mean (VWAP, SMA)
- Full target: Opposite deviation zone (rare)
Scale out as price reverts. Don't hold for home runs—mean reversion is about consistent, smaller wins.
When Mean Reversion Fails
Mean reversion doesn't work in trending markets. "Markets can stay irrational longer than you can stay solvent."
Avoid Mean Reversion When:
- Strong trend in progress: Price can stay extended in trends
- Breaking news: Fundamentals may justify the move
- Low liquidity: Price discovery less efficient
- Market structure break: The "mean" may be shifting
Check higher timeframe trend. Mean reversion works best when HTF is ranging or you're trading within the trend (reversion toward trend, not against it).
Common Mean Reversion Mistakes
- No confirmation: Deviation alone isn't a signal—wait for exhaustion signs
- Fighting trends: Mean reversion in strong trends = pain
- Too early: 1σ deviation isn't enough—wait for 2σ or 3σ
- No stops: "It has to revert" mindset kills accounts
- Wrong mean: Using daily mean for intraday trades doesn't work
Frequently Asked Questions
What is mean reversion?
Mean reversion is the theory that price tends to return to an average over time. When price moves too far from the mean (overextended), it's statistically likely to snap back. Traders exploit this by trading against extreme moves, betting on reversion.
What is the "mean" in mean reversion?
The mean can be any average: simple moving average (SMA), exponential moving average (EMA), VWAP, or a regression line. VWAP is popular for intraday mean reversion as it represents volume-weighted fair value.
What are standard deviation bands?
Standard deviation bands show how far price has deviated from the mean. 1σ = ~68% of price action falls here (normal). 2σ = ~95% (extended). 3σ = ~99% (extreme). At 3σ, mean reversion probability is very high.
Is mean reversion different from trend trading?
Yes, opposite approaches. Trend trading: "price will continue." Mean reversion: "price will reverse to average." In trending markets, mean reversion can lose. In ranging markets, trend following loses. Know which regime you're in.
When does mean reversion work best?
Mean reversion works best in: ranging markets (no trend), after extreme moves (3σ deviation), during normal market conditions (not breaking news), and on liquid assets where price discovery is efficient.
What is VWAP reversion?
VWAP reversion trades the tendency for price to return to VWAP (volume-weighted average price). VWAP represents fair value for the session. Price extended far from VWAP often snaps back, especially in ranging conditions.
How do I know if a move is overextended?
Measure distance from mean in standard deviations. 2σ = extended, 3σ = extreme. Also check: RSI at extremes (<20 or >80), price far from moving averages, volume climax suggesting exhaustion.
What are the risks of mean reversion?
Main risk: trend continuation. "Markets can stay irrational longer than you can stay solvent." In strong trends, price can stay extended for long periods. Always use stops and never assume reversion is guaranteed.