Mean Reversion or Momentum? The Answer Changes With the Regime

[Shadow Trader]

Neither mean reversion nor momentum is a permanent property of currency pairs at short horizons. Both appear, disappear, and trade places depending on liquidity conditions, session, and the presence of news flow. A strategy built on one of them is implicitly betting on a regime.

During quiet range-bound periods, small displacements often partially retrace as liquidity providers lean against order flow. During information-driven moves or stop cascades, displacements tend to extend, because orders arrive in the same direction and depth thins out.

Measuring this is possible without sophisticated tools. The variance ratio compares the variance of multi-period returns with the sum of single-period variances. A value above one hints at persistence, while a value below one hints at reversal. Rolling the calculation over recent windows shows how unstable the reading tends to be.

The practical lesson is that a fixed assumption invites trouble. A fade setup that works through the Asian session may degrade sharply when the London open changes the character of flow. Tagging trades by session and volatility state in a journal often reveals that one approach earns in one regime and gives the profit back in another, which is a more useful finding than a single overall win rate.