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.
Final Thoughts
Markets revert or they continue — nothing else. When you can tell the difference in real time, your trades stop feeling random and start aligning with the market’s actual behavior. That’s where consistency starts.