In finance, a reversal strategy and a convergence strategy are two distinct approaches to trading, with different goals and techniques.
A reversal strategy, also known as a mean reversion strategy, is based on the idea that assets tend to revert to their historical mean or average. This strategy involves identifying assets that have deviated significantly from their average price and then betting on their price returning to that mean.
For example, if a stock’s price has been consistently below its average for a certain period, a trader using a reversal strategy might buy the stock, expecting its price to rise back to its historical average. Reversal strategies often use technical analysis to identify oversold or overbought securities.
On the other hand, a convergence strategy, also known as a trend-following strategy, is based on the idea that assets tend to continue in the direction of their current trend. This strategy involves identifying assets that are moving in a particular direction and then betting that their price will continue to move in that direction.
For example, if a stock’s price has been consistently rising for a certain period, a trader using a convergence strategy might buy the stock, expecting its price to continue to rise. Convergence strategies often use trend lines, moving averages, and other technical indicators to identify trends.
In summary, the main difference between a reversal and a convergence strategy is that the former seeks to profit from a price correction toward a historical mean, while the latter seeks to profit from an ongoing trend.