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Mean Reversion screening ideas

In this article we will give some mean reversion screening ideas. Mean reversion or ‘reversion to the mean’ is a counter-trend strategy where one speculates on a correction in the current trend. The theory behind the idea is that prices never rise or fall in a straight line, but will come back to there means when they are extended.

In another article we discussed the Dynamic RSI and Chartmill Value Indicator and pointed out how they can be used to find extremes in price formations (= overbought and oversold levels where the trend may reverse).

Counter trend strategies are always a bit tricky because you will indeed go in against the current trend. Using stop orders to enter your position may be a good idea here: this does give you at least some confirmation that a reversal has started. A good thing on counter trend strategies is that you always have a good exit point near your entry (a new high or new low). So typically you will have a good risk/reward ratio.

We will list 8 screens, based on 4 indicators that can help you finding decent mean reversion setups. We will refer to the article on overbought/oversold indicators multiple times in the following sections.

1) RSI based overbought and oversold reversion.

As explained in the article linked to above, the classical RSI does give good signals when it comes out of the overbought or oversold zones. For this to happen, the reversal has already started.

2) Dynamic RSI overbought and oversold signals

As explained in the article, the dynamic RSI does a very good job at finding overbought and oversold levels.

3) Chartmill Value overbought and oversold signals

As explained in the article, the chartmill value indicator does a very good job at finding overbought and oversold levels.

4) Stochastics reversal signals

Like the RSI, the Stochastics typically remain in overbought or oversold territory for a longer period, but may give good reversal signals when the fall out of these zones.

All these screens have set filters to ensure minimum liquidity. You are of course free to set your own preferences and to combine these screens with other screens.