Mean Reversion

Mean reversion is a financial concept suggesting that asset prices tend to move back toward their long-term average over time. When prices are above this average, they are considered overvalued and likely to decrease; when below, they are undervalued and probably to increase. This behavior occurs because market forces, such as investor expectations and economic fundamentals, push prices toward equilibrium. Understanding mean reversion helps traders and investors assess when an asset’s price might change direction, assuming that extreme deviations from the average are temporary and that prices will tend to revert to their historical norms.