Mean Reversion vs. Momentum
Every market bounce and trend comes from one of two forces: mean reversion or momentum. If you don’t know which one is in control, you’re placing trades with the wrong expectations. That’s how traders buy the high in a range or fade a trend that’s nowhere near done.
The Two Core Behaviors
Markets only behave in two ways:
- Mean reversion — price snaps back toward a central value
- Momentum — price continues moving away from that value
These behaviors sit on top of market regimes. Regimes give the environment, while these forces describe the price reaction.
Mean Reversion (Bounce Behavior)
Mean reversion happens when the market overextends temporarily and snaps back. It’s the default behavior in range-bound or low-volatility conditions.
- overextensions fail fast
- breakouts reject often
- liquidity sits evenly on both sides
- rotations repeat predictably
Why It Happens
Mean reversion is caused by liquidity stacking on both sides. If liquidity providers aren’t afraid of risk, they tighten the book and absorb most aggressive orders.
Momentum (Continuation Behavior)
Momentum occurs when one side overwhelms the other. Imbalance continues hitting the tape in the same direction and price keeps running.
- higher volatility
- bigger rotations
- breakouts follow through
- pullbacks stay shallow
Why It Happens
Momentum comes from one thing: persistent order flow imbalance. This pairs directly with market imbalance.
How to Identify Which One You’re In
| Clue | Mean Reversion | Momentum |
|---|---|---|
| Liquidity | Balanced | One-sided thinning |
| Spreads | Tight | Wider |
| Breakouts | Fail often | Hold and expand |
| Candle behavior | Wicks everywhere | Directional bodies |
Why Traders Misread These Conditions
Most traders try to use one approach for everything. They fade markets in momentum and chase breakouts in ranges. They don’t look at liquidity or volatility — only the chart.
When Markets Switch Between the Two
Markets flip when liquidity behavior changes:
- LPs widen spreads → momentum increases
- LPs tighten spreads → mean reversion returns
- News hits → momentum spikes
- Midday lull → reversion dominates
This ties into time-of-day volatility patterns.
Bottom Line
Mean reversion and momentum aren’t strategies—they’re core market behaviors. Once you know which force is active, your trade expectations finally match reality instead of fighting it.