TREND FOLLOWING VS. MEAN REVERSION
Trend followers buy strength and sell weakness; mean reverters do the opposite. Both work — in different regimes — and the mistake is using one when the market is rewarding the other.
Trend following assumes that things in motion stay in motion. You enter on breakouts, ride the move with a trailing stop, and accept that 60% of trades will be small losers in exchange for the occasional 5R+ winner. Trends are rare but they pay disproportionately.
Mean reversion assumes that prices oscillate around fair value. You sell into euphoria, buy into capitulation, and target a return to a moving average. Win rates are high (70%+) but losers can be catastrophic if a trend ignores the bands and keeps running.
Regime matters enormously. In trending years (2017, 2020, 2023) trend following crushes; in chop (2015, 2022 first half) mean reversion crushes. Sophisticated traders run both side by side and let position sizing favor whichever is currently being rewarded.
Side by side
| Aspect | trend-following | mean-reversion |
|---|---|---|
| Win rate | 30–45% | 60–80% |
| Avg winner / loser | 3R+ winners, 1R losers | 1R winners, 3R+ losers |
| Best regime | Strong directional trends | Range-bound chop |
| Worst enemy | Whipsaws & false breakouts | A persistent trend |
| Common indicators | 20/50/200 MA, breakouts | RSI, Bollinger Bands |
Bottom line
Run both, but never the same way at the same time on the same instrument. Use trend following on indices and high-momentum names; use mean reversion on quality stocks pulling back to support.