Mean Reversion Trading — Part 2 | The Long & The Short Ep.17

Welcome to The Long & The Short - a show where you can expect an honest take on trading, something you won’t hear elsewhere.

I’m your host, Sandeep Rao (SEBI Registered Research Analyst – INH000013059).

In the previous episode, we established the "Theory" of Mean Reversion. In this episode (Part 2), we move from theory to Practice.

We break down the actual mechanics of building a Mean Reversion system. While Trend Following is about "joining the crowd," Mean Reversion requires a counter-intuitive psychological view-betting that the "rubber band" has stretched too far and will snap back.

We explore the four distinct ways to trade this concept:
1. Single Asset Price Reversion: Buying the dip when price deviates from its hourly/daily average.
2. Volatility Reversion: Anticipating price explosions using concepts like the Bollinger Band Squeeze and Narrow Range patterns.
3. Relative Value: Exploiting gaps in Basis, Calendar Spreads, and Synthetic Futures.
4. Pairs Trading: The "Stat Arb" approach used by institutions.
Finally, we build and backtest a Long-Only Mean Reversion Strategy on Nifty and Gold using Bollinger Bands to see if "buying the fear" actually generates alpha.

📌 Chapters:
00:00 Intro: From Theory to Practice
00:51 Psychology: Trend vs. Counter-Trend
02:16 Type 1: Single Asset Price Reversion
03:05 Type 2: Volatility Reversion & The "Squeeze"
05:34 Type 3: Relative Value (Basis & Spreads)
08:04 Type 4: Pairs Trading & Stat Arb
09:34 Strategy Showcase: Nifty & Gold System
12:00 Backtest Results: "Filling the Potholes"
14:01 Conclusion & What’s Next

References & Show Notes:
Contango & Backwardation: https://zerodha.com/varsity/chapter/f...
Ep. 16 - Mean Reversion Trading (Part 1):   • Mean Reversion Trading — Part 1 | The Long...  
Trend Following Series (Ep 9-11):    • Trend Following Series  
6 Key Weekly Market Metrics You Should Track:    • 6 Key Weekly Market Metrics You Should Tra...  
Tom Basso: Trend Following, Risk, and the Long Game | In The Money by Zerodha Podcast 02:    • Tom Basso: Trend Following, Risk, and the ...  
What is Synthetic Futures?:    • What is Synthetic Futures?  

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