Quick Short 💡

A backtested 𝗜𝗻𝘁𝗿𝗮𝗱𝗮𝘆 𝗠𝗲𝗮𝗻 𝗥𝗲𝘃𝗲𝗿𝘀𝗶𝗼𝗻 trading strategy 📈 📊

Thread ahead 🧵

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What is Reversion to Mean? 🧐

Mean reversion is a concept in finance that suggests, after an extreme price move, stock prices tend to return back to normal or average levels.

Prices do move away from the mean sometimes but revert to the mean price over time.

Extreme price moves away from the mean and is hard to sustain for extended periods.

𝗘𝘅𝗮𝗺𝗽𝗹𝗲:Extreme Gap-ups and Gap-downs

Stock tends to come back to intraday mean prices

or

Longer term moving average (100 and 200 ema) depending on the time frame you are looking at

🔸 Hypothesis:

1️⃣ Whenever stocks have a large opening gap, they tend to come back to the mean levels.
2️⃣ Backtesting is done on Nifty500 Universe and probabilities are calculated on stocks which have highest chance to fall based on historical data.

𝘌𝘹𝘢𝘮𝘱𝘭𝘦:

🔸 So out of say 10 stocks that have opened Gap-up , each stock is ranked based on a proprietary algorithm and the stock with the highest odds to revert to the mean is selected.