I thought I’d cover an important topic that took me way too long to figure out in this article… Now, I’m sure that has something to do with my stubborn nature, but I’ll save that spiel for another time.
I want to explain the difference between reversion to the mean and trending assets.
The goal is to teach you how to analyze and identify things in a new way by putting certain components in different orders, and giving you various analysis techniques to use for all of the different asset types.
So in other words, I suggest you pay close attention to what I’m about to say…
The Difference Between Reversion to the Mean and Trending Assets: Let’s Learn the Basics
Before we jump into the “meat and potatoes” of this topic and the difference between reversion to the mean and trending assets, I’d like to take a moment and explain what each of these two things mean.
Reversion to the mean is the theory that an asset’s price will revert to its long-term mean or average level at some point. In other words, the asset’s price should converge to its average price over time.
A trending asset is when a company’s stock is experiencing a significant move (it can be either up or down) in comparison to its underlying index.
The Difference Between Reversion to the Mean and Trending Assets: 1 Mistake Most Traders Make
When I first started backtesting systems and using indicators on charts, I started with futures before getting into traditional stocks a year or two later.
So I have experience with trading all different types of assets.
But I realized that when I first started to backtest, I had this theory in my head that every system had to work for every type of asset.
I thought I could use the exact same indicator when going long and short…
I still believe traders need to be somewhat consistent. However, I was making a huge mistake that I don’t want you making!
So it’s important that we clear up the difference between reversion to the mean and trending assets right now…
2 Things All Traders Need to Understand
There are only two primary types of assets that are tradeable: reversion to the mean and trending assets.
And before you get into any kind of analysis, you must identify which one of those two things the market you’re looking at falls under.
That’s because the tools used to analyze the reversion to the mean market are completely different from the trending ones.
Now, sometimes you might be able to use the same type of indicator for both, but it’ll be in a different way.
So understanding the difference between reversion to the mean and trending assets is important.
Things to Keep in Mind
At first glance, the difference between reversion to the mean and trending assets might not seem relevant or important to you. But if you want to learn more about and get deeper into trading to expand your skill set, the video below will help you do so.
That’s because it’ll teach you which indicators you should and shouldn’t use when trading specific stocks and assets.
Check out my short video below and we’ll go into even more detail about the difference between reversion to the mean and trending assets.
I hope this helps!
Don’t forget to like and subscribe to our YouTube channel if you haven’t already so you can be notified as soon as we post our next video, and see what other trade opportunities we’re paying close attention to!
All the best,
Roger Scott
Senior Strategist, WealthPress
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