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Momentum vs Mean Reversion: Finding Your Edge in 2025

-- min read

Momentum vs Mean Reversion: Finding Your Edge in 2025


“Markets are never wrong—opinions often are.” — Jesse Livermore

1 | Why This Debate Still Matters

Ask ten active traders what “edge” they rely on, and you’ll hear two camps shout back:

Camp Core Belief Typical Tools
Momentum Price keeps moving in its current direction longer than most expect. ORB, VWAP, moving-average crossovers, relative-strength screens
Mean Reversion Price eventually snaps back toward a fair-value magnet. Bollinger Bands, RSI 70/30 fades, anchored VWAP “overshoots”

Both edges work—but never at the same time. Your real job is to decide which regime the market is in right now.


2 | A 3-Step Regime Filter (15 min Setup)

  1. Trend Temperature
    Plot a 21-EMA on the daily chart.

    • Above & rising ≥ 30° → Momentum prime

    • Below & falling → Mean-reversion season

  2. Volatility Pulse
    ATR(14) ÷ 200-day average of ATR

    • 1.20 → Hot momentum

    • < 0.80 → Cooling → watch for snap-backs

  3. Liquidity Check
    Daily $ volume ÷ 20-day median ≥ 1.5? If not, skip; thin books distort both edges.

🛠 Pro-tip: Drop those three metrics into a TradingView “Pine script” alert. When all momentum lights flash green, your ORB + VWAP combo (see Part 1) has statistically doubled its win-rate in my back-tests.

3 | Live-Fire Example (SPY, 15-min)

  • Date: 24 March 2025

  • Trend Temp: 21-EMA rising 32°

  • Vol Pulse: 1.34

  • Opening Range: 5-point box, break-up at 10:07 ET

  • VWAP: Held as dynamic support → add-on at VWAP kiss

  • Exit: +2 R at European close drift

Two sessions later the same filter flipped to mean-reversion; a short off the upper Bollinger returned 1.6 R in under an hour. Same ticker, inverse edge.

4 | Risk Table—Edge Mismatch Hurts

Scenario Expectation Reality Typical Drawdown
Fade a runaway Nasdaq gap (mean-revert mind-set in momentum regime) Quick 0.5 R scalp 8-R max pain as squeeze continues -4 % acct
Chase a breakout in a flat ATR week (momentum mind-set in mean-revert regime) 2 R breakout Fake-out, closes red same bar -1 % acct

Matching the right tool to the right environment isn’t optional—it’s survival.

5 | Action Checklist for This Week

  1. Run the filter on your top-20 watch-list every Sunday night.

  2. Tag each symbol MOM or MEAN in your platform.

  3. Stick to playbooks:

    • MOM: ORB + VWAP continuation, trendline retests, bull flags.

    • MEAN: 2-ATR band fades, RSI/CCI divergences, VWAP overshoots.

  4. Journal edge-regime alignment—after 30 trades you’ll have objective data.

6 | Further Reading

If momentum is flashing green, sharpen your ORB entries with my guide on unlock­-vwap-trading-strategy-dominate. Prefer the rubber-band plays? Dive into why-purchase-call-options for low-risk contrarian structures.

Bottom Line

Momentum and mean reversion are not rival religions—they’re alternating seasons. Learn to read the calendar and you’ll plant the right crop every time.

Next up: I’m coding a free Python back-tester that auto-switches edges based on the filter above. Want the repo link? Hit the Subscribe button in the sidebar and you’ll be first to know.

Happy hunting,
Deno Trading 📈🫡