Mean Reversion & Pullback Trades: Betting on the Bounce

Not every trade is about chasing trends. Sometimes, price moves too far in one direction and then snaps back — like a stretched rubber band. That’s where mean reversion and pullback trades come in.

🌀 What is Mean Reversion?

Mean reversion is the idea that price eventually returns to its average after moving too far away. 👉 Think of a basketball bouncing: it goes high, but gravity eventually pulls it back down. Or if it hits the ground too hard, it bounces back up. In trading, when price is too high or too low compared to its recent average, traders expect a reversion to the mean.

🔑 Signs of Mean Reversion

1. Overbought or Oversold Levels — RSI above 70 = overbought, price might pull back. RSI below 30 = oversold, price might bounce up.

2. Far from Moving Averages — If price moves too far from the 50-day or 200-day MA, it often snaps back toward it.

3. Sharp Spikes — Sudden big moves from news, hype, or panic often cool off quickly.

📉 What is a Pullback Trade?

A pullback is when price is trending in one direction but temporarily moves against the trend. In an uptrend, a pullback is a dip. In a downtrend, a pullback is a bounce. 👉 Smart traders buy dips in an uptrend and sell rallies in a downtrend.

🚀 How Traders Use It

Buy the Dip: In an uptrend, wait for price to fall back to support, then enter. Sell the Rip: In a downtrend, wait for price to bounce back to resistance, then enter. Options Strategy: Call options on dips in an uptrend, or put options on rallies in a downtrend.

📝 Example

Imagine Apple is trending upward from $150 to $170. Price pulls back to $160 near the 50-day MA. RSI dips from 70 to 45, showing less heat. Volume slows down on the pullback. A trend follower buys at $160, expecting the uptrend to continue toward new highs.

🚫 Common Mistakes

Buying too early just because price looks cheap — wait for confirmation. Confusing a pullback with a full reversal. Ignoring volume — strong pullbacks usually happen with lower volume than the main trend.

🎯 Quick Takeaways

Mean reversion = price moves back to its average after extremes. Pullbacks = temporary moves against the trend, good entry opportunities. Best trades happen when the main trend is clear, and the pullback shows weakness. Always confirm with support/resistance, moving averages, and volume.

🔑 Next in Strategies & Tactics: Breakout vs. Fakeout: How to Tell the Difference