Look at a stock that has just fallen 6% in two days. One investor sees an opportunity: the drop has been excessive and the price will probably recover part of it. Another sees a warning: something is going wrong and the fall may continue. Both are following a well-known idea about markets, and both are right some of the time.
These two ideas are called mean reversion and trend following. Understanding them helps to read almost any signal, ours included.
Mean reversion: what goes too far tends to come back
The idea is that prices oscillate around a "normal" level and that extreme moves tend to be partly corrected. A stock that has fallen much more than usual in a few days, without a change in its business, often recovers part of the drop.
How it is usually traded:
- Entry: after a sharp, short-lived move against the trend.
- Target: small, because the aim is to capture part of the rebound, not a new trend.
- Duration: short, days rather than months.
- Typical profile: many small gains and fewer, larger losses.
When it suffers: when the drop is not a passing excess but the beginning of something worse. A rebound strategy buys precisely when the price is falling, and if the fall continues it takes the loss.
- 1A sharp three-session drop with the price still above its 200-session average: RSI(2) collapses.
- 2The price recovers part of the drop within a few sessions. That is what a bounce looks for; it does not always happen.
Trend following: what moves tends to keep moving
The opposite idea: prices have inertia. A stock that has started to rise strongly, with a solid structure behind it, tends to keep rising for a while, because the news, the flows and the investors that pushed it do not disappear overnight.
How it is usually traded:
- Entry: when the trend is already visible and gaining strength.
- Target: larger, because the aim is to stay in the move.
- Duration: weeks or months.
- Typical profile: fewer winning trades, but each one can be larger.
When it suffers: in markets that move sideways, where every apparent breakout fails and turns back. And it always arrives late: by definition, part of the move has already happened when the trend is confirmed.
- 1Breakout: the price closes above the ceiling it had been stuck under for weeks.
- 2The trend carries on above its 50-session average. When one turns, it exits at a loss: not every breakout follows through.
Side by side
They are not enemies. They work in different situations and on different time scales, which is why many investors combine them.
How InbestPlanners applies each idea
Our two methods are a direct application of these two ideas, with their rules published in advance.
Bounce: mean reversion inside an uptrend
A Bounce signal looks for a stock whose long-term trend is up (its close above its 200-session average) and which has just fallen sharply, measured with a two-session RSI. The long-term filter is the key: it tries to separate a dip in a healthy stock from the fall of a stock that is already in trouble.
- Target: +3% on the published buy price.
- Horizon: about 10 sessions; at most 35.
Impulse: trend following
An Impulse signal looks for a stock that is already moving up with strength, from two rules: a strong, well-ordered trend, or a breakout with unusually high volume.
- Target: +10% on the published buy price.
- Horizon: several months; at most 125 sessions.
Each method has its own exits, its own stops and its own Conviction Score, calculated by a separate model, because what makes a good rebound is not what makes a good trend. Getting Started explains both in detail.
The market matters, and not in the same way
The same market situation can be good for one idea and bad for the other. When a market index is below its long-term average but has started to recover, a rebound strategy may find good conditions while a trend strategy struggles, because the next leg down can cut short a trend that needs weeks to develop.
That is why the context we show next to new signals is measured separately for each method, each market and each market state, and labelled according to how sure the measurement is, including "no signal" when the data cannot tell. It is a description of the past, not a forecast.
How to choose
There is no correct answer, only a better fit:
- If you check your positions often and prefer short trades, a rebound approach fits, but small targets make costs weigh more: check what your broker charges.
- If you prefer patience and fewer decisions, trend following fits, but you have to accept that some winners will take months and that you will often buy after a rise.
- If you combine both, keep them separate: a rebound trade that goes wrong should not become a "long-term investment".
In short
- Mean reversion buys excessive drops and aims for a partial rebound; trend following buys strength and aims to stay in the move.
- The first suffers in falls that continue; the second in sideways markets.
- Bounce applies the first inside a long-term uptrend; Impulse applies the second.
- Each one has its own rules, its own model and its own reading of the market context.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results.