Decoding Mean Reversion – Strategies and Indicators

January 31, 20247 min read
Decoding Mean Reversion – Strategies and Indicators
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways 

  • Mean reversion is a theory which posits that, over time, prices will move toward a long-term average.
  • The mean reversion calculation gauges the extent to which an asset’s price has deviated from its longtime mean. 
  • Economic events or news can disturb mean-reverting patterns, resulting in prospective losses

To establish a trading strategy, mean reversion is often employed as a statistical analysis of market conditions. The theory is also used in options pricing to measure the fluctuation of an asset’s volatility and long-term average.

But just what is, “mean reversion?” Here it is decoded, including strategies and indicators.

What is Mean Reversion?

In the investment space, mean reversion is a theory or concept used by traders and investors to time strategies. It suggests that, over time, prices will move toward a long-term average. 

Following that theory, then, the greater a mean is deviated from, the greater the likelihood that an asset’s price will, in the future, gravitate toward it.

Mean reversion has spawned a number of investing approaches involving buying or selling securities that, of late, have performed markedly differently from their historical averages.

Such approaches include statistical analysis, which assesses the extent to which an asset price has deviated from its “mean.” They also include volatility, risk management, and algorithmic trading strategies. More on this later.

Note that time horizon and market conditions figure prominently in mean conversion. For example, based on the time horizon, a mean reversion strategy’s effectiveness can vary. While long-term investors may utilize annual data, short-term traders may employ intraday data.

In an additional consideration, mean conversion is generally less effective in trending markets than in range-bound markets.

How Do You Calculate Mean Reversion?

The aim here is to gauge how much an asset’s price has deviated from its longtime mean. It involves a series of steps:

First, the asset’s historical price data is determined, with the time frame depending upon the time horizon. The average price is then computed over the chosen time frame.

Mean = Sum of Prices / Number of Observations

Next, each price point deviation is calculated.

Deviation = Price – Mean

Then, to understand the volatility, the price series’ standard deviation is computed.

Standard Deviation = Square Root (Sum of Squared Deviation/(Number of Obsevations – 1)

A Z-score, which measures the number of standard deviations from the mean, is next determined with these figures. 

Z – Score = Deviation /Standard Deviation

If a Z-score exceeds a specific threshold, usually 1.5 or 2, that may indicate an overvaluation. If the score is under the threshold, typically -1.5 or -2, could mean the asset is undervalued.

In an example, say a mean reversion case involves company ABC’s stock, which, over the last 200 days, has had an average closing price of 50. Then comes a favorable earnings report, which causes the price to rise to $70.

The stock price’s standard deviation over the last 2000 days is $5.

The Z-score is next calculated where (70-50)/5=4.

With a Z-score of 4, the stock is substantially overvalued, as measured against its historical “mean.” Because the stock is expected to revert to its mean, it could be a sign to short it.

Once the excitement fades over the next few weeks, the stock price ultimately falls back to about $52, which has more proximity to its historical mean.

Mean Reversion Strategies 

There are a number of trading and investing strategies that involve mean reversion, including:

  • Mean reversion for forex strategy. Strategies here seek to take advantage of currency pairs reverting to their historical mean or average price. Traders frequently employ moving averages to find the mean exchange rate for a certain period. A reversion is frequently expected when a currency pair deviates substantially from the average.
  • Mean reversion for intraday. These strategies involve purchasing and selling assets throughout a single day, with some traders opting to trade around a moving average. They work best with the presence of a potent trend, combined with a moving average wherein the price usually gets close then gravitates toward the trend.
  • Mean reversion in pairs trading. With this approach, two correlated assets are identified. Investors and traders go short on the overvalued asset and long on the undervalued one when the price ratio between the assets deviates from its mean.

What are Arguments for Mean Reversion 

Those who come down on the side of mean reversion trading strategies point to successful track records. A number of investors including hedge fund founder Jim Simons have done very well with them.

Warren Buffet and other successful long-term investors employ a type of contrarian investing strategy that can be likened to mean reversion.

What are Arguments Against Mean Reversion?

On the other hand, some people contend that markets are efficient on their own. They believe that markets do, indeed, mirror all information available. Further, they maintain that, unless insider information or similar is provided, it is impossible to beat the markets.

Those who are against mean reversion also cite poor performance indicators. The argument is that tools similar to reversion indicators such as Shiller’s CAPE used insufficient sample sizes in testing. Therefore, their results would not work against the entire market.

What are the Benefits of Mean Reversion?

While there are challenges with mean reversion, including transaction costs and sensitivity to market conditions, there are benefits including a structured methodology for trading. This renders it easier to pinpoint entry and exit points.

Mean reversion is also versatile, in that it is applicable across various time frames and asset classes, ranging from intraday to long term.

Also, mean reversion has profit and growth prospects, particularly in range-bound markets where approaches such as trend-following may be less effective

What are the Limitations of Mean Reversion?

Challenges and limitations are part of any approach. Mean reversion limitations can include volatile market conditions. Such reversion does not work as well in robustly trending markets, where prices for extended periods may not revert to the mean.

Also, economic events or news can disturb mean-reverting patterns, resulting in prospective losses. Then there is the lack of direction. Mean reversion, unlike trend-following approaches, is non-directional. This may not work with all trading styles.

Further, shorter time frames are particularly susceptible to market rumbling, which can produce false mean-reverting signals.

Then there are the higher transaction costs associated with the frequent trading the strategy often involves.

What are Alternatives to Trading?

Traders and investors, to help time their trading and investing approaches, use mean reversion, and many have benefited. However, many are also seeking to counter the constant volatility of public markets by investing in alternatives — asset classes other than stocks and bonds. Ranging from art and real estate to venture capital and private credit, alternatives are increasingly popular due to their low correlation to public markets.

After all, over nearly the last two decades, private markets have beaten stocks in every economic downturn. While no investment is risk free, investors can potentially grow and protect their wealth by adding alternatives to their portfolio.

The leading alternative investment platform, Yieldstreet, has had some $4 billion invested on it as of 3/31/24. It offers the broadest selection of alternative asset classes available in accessible, highly vetted opportunities.

Creating a modern portfolio of varying asset types and expected performances also serves another essential purpose: diversification. Diversified holdings can potentially mitigate risk, protect against inflation, and even improve returns.

Invest in Alternative Assets

Diversify your portfolio with private market investment offerings.

Alternative Investments and Portfolio Diversification 

Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that meant the potentially attractive gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other alternative investments. 

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

As a financial theory, mean reversion posits that asset prices have a proclivity to, over time, revert to their historical mean or average. It acts as the foundation for a host of trading approaches across varying asset classes. However, investors and traders must be mindful of risks and limitations.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022


No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (collectively, “Synapse”) as well as certain third-party financial services partners. Synapse is not a bank and is not affiliated with Yieldstreet. Bank accounts are established by Evolve Bank & Trust. Brokerage accounts and cash management programs are provided through Synapse Brokerage LLC (“Synapse Brokerage”), an SEC-registered broker-dealer and member of FINRA and SIPC. Additional information about Synapse Brokerage can be found on FINRA’s BrokerCheck. By participating in a Synapse cash management program, you acknowledge receipt of and accept Synapse’s Terms of Service, Privacy Policy, and the applicable disclosures and agreements available in Synapse’s Disclosure Library.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure