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it will tend to snap back to some sort of long term average price. Mean reversion may involve a myriad of strategies, such as short term overbought and oversold oscillators, regression channels, Bollinger Bands, moving averages, etc.

For example, of a stock is trading within a decent uptrend, and then sells off to below its rising moving average, a trader will try to pick a bottom with the idea that the stock will at least return to that moving average. Or, if a stock is in a downtrend, and has sold off sharply, a quick snap back to that moving average may also be expected.

Typically, the trader will simply look for evidence that the current move has run out of steam. If a stock is extended in price to the upside and loses upside momentum, the trader will simply short the stock and place a stop somewhere pretty close to the highs. This keeps his potential loss relatively small, while the reversion to the mean could mean a relatively significant move. This is the type of risk and reward setup an experienced trader will look for.

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However, the danger is that if the trader goes short and holds the position overnight, the stock could gap through his stop loss, and hand the trader a sizable loss.

No matter what type of strategy the daytrader employs for entering and exiting positions, the long term key to success of the trader will be the proper use of risk management, and strong discipline. Having confidence in the strategy you select through sound research should result in an ability to have the discipline to stick with the strategy through periods when it is not performing well.

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