Mean Reversion

Overview

Category: Diversified — Contrarian Timeframe: Single (5m) Best Regime: Ranging and Volatile Typical Hold Time: 30 min - 4 hours

The Mean Reversion strategy identifies when price has deviated significantly from its statistical mean and enters in the direction of expected reversion. This is a contrarian approach — it enters against the current price movement, betting on the rubber-band snap-back.

Entry Logic

LONG (buy the dip)

• Price is at or below the lower Bollinger Band (2.0 standard deviations)

• RSI indicates oversold conditions (regime-adaptive threshold)

• Bollinger Band width is expanding (volatility present for reversion)

• Regime is NOT strong trending (mean reversion fails in trends)

• Order flow shows early signs of buyer re-entry

• OI × Price divergence analysis confirms (if Coinglass available)

SHORT (sell the rip)

OI × Price Divergence Engine

The Mean Reversion strategy uniquely benefits from the OI × Price Divergence analysis used across the diversified strategies:

OI Direction	Price Direction	Classification	Meaning
OI Rising	Price Rising	CONFIRM_BULL	New money entering longs
OI Rising	Price Falling	CONFIRM_BEAR	Shorts adding aggressively
OI Falling	Price Falling	LONG_LIQUIDATION	Cascade fuel (contrarian long)
OI Falling	Price Rising	SHORT_SQUEEZE	Shorts covering (contrarian short)

For Mean Reversion specifically, LONG_LIQUIDATION is a strong long signal (liquidation cascade exhausting, snap-back imminent).

Specialized Time Decay System

Mean Reversion has a unique time-based exit system because the probability of reversion decays exponentially with time.

1

Phase 1

0–1h — Gentle monitoring, no action

2

Phase 2

1–2h — If 0.5R not reached → aggressive tighten

3

Phase 3

2–3h — Lock 65% of existing profit

4

Phase 4

3–4h — Force close unless 3%+ profit

5

Absolute Max

6h — Nuclear close — no exceptions

The decay follows:

$$P(\text{revert}) = e^{-0.45 \times \text{hours}}$$

This implies P(revert) ≈ 60% at 2 hours and ≈ 15% at 4 hours.

TP / SL Regime Adjustment

• Ranging: TP ×0.80 (take quick profit), SL ×0.90 (tighter)

• Volatile: SL ×1.15 (avoid stop hunts in high ATR)

• Trending: Strategy skipped entirely (mean reversion fails in trends)