Mean Reversion Trading is a quantitative strategy that assumes asset prices will eventually return to their historical average or mean after deviating significantly. In crypto markets, its purpose is to capitalize on temporary price anomalies by buying undervalued assets or selling overvalued ones, expecting a correction back to an established equilibrium.
Mechanism
This strategy functions by employing statistical models and algorithms to identify when a cryptocurrency’s price has moved beyond a predetermined historical average, often defined by moving averages or other indicators. Upon detecting such a deviation, automated systems initiate trades to position against the current price movement, anticipating a reversal.
Methodology
The strategic approach involves rigorous backtesting and continuous calibration of statistical parameters to define the mean and deviation thresholds accurately. This methodology typically uses pairs trading or single-asset approaches, requiring robust risk management to account for prolonged trends or shifts in market fundamentals that might invalidate the reversion assumption. It targets short-term market inefficiencies.
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