Mean Reversion

Mean reversion is the tendency of prices to return to an average after moving away from it. In swing trading, this manifests as pullback entries: a stock in an uptrend pulls back to its EMA, and you buy the return to the mean — not the initial breakout.

Why Mean Reversion Works

Stocks in uptrends don't move in straight lines. They trend, retrace, trend, retrace. The retracement phase is when weak hands sell — taking profits or cutting losses. This temporary selling creates a dip to the moving average where the underlying trend is still intact. Buying that dip — the "mean reversion entry" — provides a tighter stop (below the EMA) and better R:R than buying the breakout.

RSI as the Mean Reversion Signal

RSI reset to 38–58 during a pullback in an uptrend is the Scanner 2 (SwingGate_PullbackNews) signal. The RSI was elevated during the uptrend (65–75), the pullback reset it to neutral, and now it's positioned to resume the trend direction. Scanner 2 specifically targets this RSI reset zone combined with EMA support.

The Entry Criteria for Mean Reversion Swings

Trend intact: EMA20 still above EMA50. Not broken down. Pullback to EMA: Price within 3.5% of EMA20 or EMA50. Volume drying up: Selling pressure exhausted — volume below average for 5+ days. Bounce beginning: Green candle today on above-average volume. RSI reset: RSI in the 38–58 zone.

This is Scanner 2 (SwingGate_PullbackNews) in your TOS Script Library. It finds these setups automatically during the Sunday scan.

Mean Reversion vs Catching a Falling Knife

Mean reversion buying in an uptrend is disciplined. Buying a stock that's been declining for 3 months "because it's cheap" is catching a falling knife. The difference: in mean reversion, the trend structure is intact (EMA stack bullish, above 200-day SMA, each pullback holding higher than the last). In a knife catch, structure is broken and you're guessing at the bottom.