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Mean Reversion

The tendency of a price or spread to return to its average.

Mean-reverting series oscillate around a long-run level; traders fade extremes, expecting a snap back. A z-score of the spread is the classic signal — enter when |z| is large, exit near zero. Trends are the opposite regime (momentum).

z = (xₜ − rolling_mean) / rolling_std
Trade when |z| exceeds a threshold (e.g. 2)

mu = spread.rolling(60).mean()
sd = spread.rolling(60).std()
z = (spread - mu) / sd          # enter when |z| > 2, exit near 0