Mean reversion is a channel indicator. It displays on the price chart a channel made up of three lines and a moving average
It has two adjustable parameters:
- Range - channel calculation range
- MA period - period of Moving Average
Calculations:
Highest= Max
Lowest = Min
Median = (Max+Min) / 2
MovAvg = SMA(Close, MA period)
where:
Max, Min - the minimum and maximum prices within the Range
Once the channel reaches the extreme channel value, a position can be opened in the direction outlined by the moving average or towards the channel center. Thus, the indicator helps to make a position entry decision in counter trend strategies, in expect the price is expected to return to the average value.