6. Mean Reversion Trading

Stocks Tend to Mean Revert

The academic evidence for the mean-reverting tendency of stocks abound.

Among the major findings, one of the more interesting conclusions is that momentum and mean reversion can perfectly coexist in the stock market. 

In other words, the strategy of joining or fading the stock market’s biggest winners can both be potentially profitable systems.

This is because outperformance tends to persist in the intermediate-term and reverse in the longer-term. At a certain point, at around the 3-5-year point, buying the market’s biggest losers actually outperforms that period’s winners.

This is according to research done by Werner F.M. De Bondt and the famous Richard Thaler of Thinking Fast, and Slow.

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