Learning mean-reversion strategies

Mean-reversion strategies are based on the assumption that some statistics will revert to their long-term mean values.

Bollinger band strategy

The Bollinger band strategy is based on identifying periods of short-term volatility.

It depends on three lines:

• The middle band line is the simple moving average, usually 20-50 days.
• The upper band is the 2 standard deviations above the middle base line.
• The lower band is the 2 standard deviations below the middle base line.

One way of creating trading signals from Bollinger bands is to define the overbought and oversold market state:

• The market is overbought when the price of the financial asset rises above the upper band and so is due for a pullback.
• The market is oversold when the price of the financial asset drops below the lower band and so is due to bounce back.

This is a mean-reversion strategy, meaning that long term, the price should remain within...