Mean Reversion vs. Trend Continuation: How Markets Really Move

Markets only move in two ways: they either revert back to value (mean reversion) or extend directionally (trend continuation). Traders constantly confuse the two, which leads to taking counter-trend trades in trending markets or chasing trends when the market is clearly reverting.

What Is Mean Reversion?

Mean reversion happens when price snaps back toward its equilibrium after stretching too far. The market says, “That move was exaggerated — bring it back.”

Signs of mean reversion:

• Sharp pullbacks after an extreme move
• Price rejecting far-from-value levels
• Volume thinning as price stretches
• Liquidity pools sitting just behind the move

What Is Trend Continuation?

Trend continuation happens when price keeps pushing in the same direction because order flow and sentiment support the move.

Signs of continuation:

• Strong volume confirming direction
• Shallow pullbacks
• Repeated structure breaks
• Liquidity being formed behind the trend, not in front of it

Mean Reversion vs Trend Continuation Table

Condition	Mean Reversion	Trend Continuation
Volume	Weak into extremes	Strong with the move
Structure	Fails to break highs/lows	Breaks highs/lows repeatedly
Liquidity	Pooling above or below extremes	Following behind the trend
Pullbacks	Deep, violent	Shallow, controlled

Why Traders Misread These Setups

Most traders try to fade strong trends or chase reversion moves long after they’re done. They trade based on hope, not structure. To stop doing this, you need to identify which environment the market is in before you click the button.

How to Identify the Correct Behavior Early

• If the market fails to make new highs/lows → think mean reversion.
• If the market keeps breaking structure → think continuation.
• If liquidity builds ahead of price → expect reversion.
• If liquidity builds behind price → expect continuation.

To understand how liquidity plays into this, see: Liquidity Gaps and Why They Form.