Mean reversion terms
Plain definitions for the language used across this site. Where a term has a lesson behind it, the entry points to the page that develops it.
The terms, defined
Mean reversion
The tendency of a price stretched far from its typical level to return toward it, and the family of strategies that bet on that return.
The mean
A typical level a price sits near - a moving average, a fair value, or a stable relationship between two assets - against which a stretch is measured.
Standard deviation
The typical size of a price's wiggle around its mean; it is the yardstick that decides whether a given gap is ordinary or unusual.
Stationarity
The property of a series that has a stable mean and spread over time. Reversion only makes sense for a series that is stationary enough to have a level to return to. See: the statistics of reversion.
Holding clock
The horizon over which a trade is expected to revert - from a single session to a long position - which changes the mean, the move size, the cost and the risk. See: holding clocks.
Conviction grade
An A-to-D label marking how far into the tail a reversion stretch sits, scored against the model's own return distribution; the ladder runs A, B, C, D, with D the lowest step. See: grades that are measured.
Cryptographic timestamp
A hash of a trade written to a public ledger when it is issued, proving the trade existed in exactly that form at that moment and was not altered afterward. See: issued before the outcome.
Drawdown
The deepest peak-to-trough fall over a period - for a reversion strategy, the truest read on the risk that a stretch does not close.
Backtest
A simulation of a strategy run over past data. Useful for research, but not a live record: parameters can be tuned after the fact, and no one issued the trades in real time. See: how to verify a record.
Track record
The full history of issued trades, winners and losers together, informative only when the losing trades are left in and the period is continuous. See: a re-runnable record.