Mean Reversion

Definition

Mean reversion describes the historical tendency of price to return toward an average or reference area after moving an unusually large distance away from it.

The reference may be a moving average, a volatility-based level, a volume-derived reference, or a statistically derived MPM Zone. Different references measure different behaviours, but the underlying concept is the same: how often historically stretched prices moved back toward the reference — and how often they did not.

Mean reversion is conceptually different from momentum, where historically strong moves tend to continue rather than reverse.

Why It Matters

Many trading decisions ultimately assume one of two market behaviours: that price continues moving (momentum), or that price returns toward a reference (mean reversion).

Choosing the wrong assumption can be expensive. Selling every strong rally because it "must come back," or buying every sharp decline because it "looks oversold," ignores the historical conditions under which mean reversion has actually occurred.

The useful question is not "Will price reverse?" but "How frequently has price historically reverted under conditions similar to these?"

To ground the idea: suppose price stretches unusually far from a reference area. Historically, one can measure how often price then moved back toward that area within a defined period — and, just as importantly, how often it continued away instead. Both outcomes are part of the record.

MPM Perspective

Mean reversion is one of the market behaviours studied within the MPM research framework.

Rather than assuming that stretched prices should reverse, MPM measures historical behaviour around statistically derived MPM Zones to understand what actually happened across comparable historical observations. A price stretching away from a zone is only informative if its historical behaviour at that distance can be measured — including the cases where price kept going rather than reverting.

The emphasis is always on measured historical evidence rather than assumed market behaviour.

Common Misconceptions

"Price always returns to the mean."

No. Historical evidence shows stronger reversion under some market conditions than others, and powerful trends can keep prices away from any average for extended periods. "Always" is the trap.

"A stretched market is automatically a buying or selling opportunity."

No. Distance from a reference level provides context, not a trading instruction. Some stretched markets reverse; others continue much further. Both outcomes form part of the historical record.

"Mean reversion and momentum cannot both be true."

They describe different historical tendencies. Some environments have historically favoured continuation, others reversion. The objective is to identify which behaviour has historically dominated under comparable conditions.

Limitations

Mean reversion is a conditional historical tendency, not a universal market law. Its observed behaviour depends on the reference being measured, the timeframe, market structure, the volatility regime, liquidity conditions, and the historical sample being studied.

Historical frequencies may also change as market behaviour evolves. For that reason, MPM treats mean reversion as historical evidence — not as a permanent market rule, and not as a guarantee that any individual stretched price will move back.

How This Fits Into MPM

Mean reversion relates to MPM's broader work because much of MPM's research examines how price has historically behaved after interacting with statistically derived MPM Zones — and reversion is one of the behaviours those interactions can exhibit.

You'll encounter the concept in:

• Research Papers, where market behaviours are tested against historical data.
• Reaction Library, where historical reactions around MPM Zones — including both the cases where a zone held and the cases where it broke — are documented, so reversion-style behaviour can be inspected alongside the cases where it did not occur.
• Daily Analysis, where current market behaviour is interpreted using the same research framework.
• Intelligence Circle, which extends the published research with deeper investigations.

MPM's broader objective is to research statistically measurable market behaviours of all kinds — reversion is one behaviour among several, not the whole of the framework.