Mean Reversion!

Aug 23, 2023

Nassim Nicholas Taleb is a former options trader and risk analyst who is now a best-selling author and essayist. He is known for his work on black swan events, randomness, and antifragility.

Taleb has written about mean reversion in several of his books, including Fooled by Randomness and The Black Swan. He argues that mean reversion is a statistical phenomenon that can be exploited by traders and investors. However, he also warns that mean reversion is not always reliable and that it can be difficult to predict when it will occur.

In Fooled by Randomness, Taleb writes:

"Mean reversion is the tendency of a variable to return to its average value after a period of deviation. This tendency is not perfect, but it is strong enough to be exploited by traders and investors. For example, if a stock price has been rising for a long time, it is likely to fall back to its average price at some point. This is because the stock price is likely to be overvalued at this point, and investors will start to sell it.

"However, mean reversion is not always reliable. There are times when a variable will continue to deviate from its average value for a long period of time. This is why it is important to use other tools, such as technical analysis, to help you identify mean-reverting markets."

In The Black Swan, Taleb writes:

"Mean reversion is a powerful force in financial markets, but it is not infallible. There are times when markets will deviate from their average values for extended periods of time. These are the black swan events that can cause great financial losses."

Taleb's views on mean reversion are controversial. Some traders and investors believe that mean reversion is a reliable trading strategy, while others believe that it is too risky. Ultimately, the decision of whether or not to use a mean reversion strategy is up to the individual trader or investor.

Here are some of the pros and cons of using a mean reversion strategy:

Pros:

Mean reversion is a statistical phenomenon that has been observed in many different markets.
Mean reversion strategies can be relatively simple to implement.
Mean reversion strategies can potentially generate profits over the long term.
Cons:

Mean reversion is not always reliable.
Mean reversion strategies can be difficult to time correctly.
Mean reversion strategies can be susceptible to black swan events.
Overall, mean reversion is a trading strategy that can be effective in some markets and under some conditions. However, it is important to be aware of the risks involved before using this strategy.
My Version of Mean Reversion:
(Top right corner chart: Distance from SMA 50 based on ATR, %, and Stdev + Max and Min yearly)
QQQ:
https://www.tradingview.com/x/J2NIcT6m/

SPY:
https://www.tradingview.com/x/J6YkydK7/

AAPL:
https://www.tradingview.com/x/4Bn2Bzgt/

MSFT:
https://www.tradingview.com/x/2jeG5FK3/

TSLA:
https://www.tradingview.com/x/Om8sXk0D/

NVDA:
https://www.tradingview.com/x/fbtMIHjw/

SMH:
https://www.tradingview.com/x/KsgCeXMJ/