Mean reversion
Why do prices that fall far below their recent level sometimes snap back quickly, and what does that tell a trader?
In plain words
Mean reversion is the tendency of a price that has moved sharply away from its recent average to drift back towards that average. It does not mean every fall rebounds; it describes a pattern that can appear when a move overshoots and then unwinds.
Why it matters
When prices swing violently both ways within a short window, entry and exit timing matters more than the direction of the weekly change. A position opened before the fall and closed at the weekly close looks very different from one opened after the rebound.
In a real week: ETH, week of 18 January 2021
In the week of 18 January 2021, ETH opened at 1232.5, rose to a high of 1438.3 on Tuesday 19 January at 12:00 UTC, then fell to a low of 1042.31 on Friday 22 January at 01:00 UTC, giving a week's range of 37.99% between high and low. Its worst day was -19.3% on Thursday 21 January and its best day was +12.89% on Sunday 24 January. ETH closed the week at 1392.51, up 12.98%, having surrendered most of the fall before closing near the top of its weekly range.
A common mistake
Assuming a sharp fall guarantees a rebound. Mean reversion describes one observed pattern, not a promise; prices can also keep falling without returning to the recent average.