After the momentum strategy, we will now look at another very popular type of strategy, the mean reversion strategy. The underlying precept is that prices revert toward the mean. Extreme events are followed by more normal events. We will find a time where a value such as the price or the return is very different from the past values. Once established, we will place an order by forecasting that this value will come back to the mean.

Reversion strategy uses the belief that the trend of quantity will eventually reverse. This is the opposite of the previous strategy. If a stock return increases too fast, it will eventually return to its average. Reversion strategies assume that any trend will go back to the average value, either an upward or downward trend (divergence or trend trading).

Advantages of the reversion strategy:

• This class of strategy is easy to understand.

Disadvantages of the reversion strategy:

• This class of strategy doesn't take into account noise or special events. It has a tendency to smooth out prior events.