HalfLifeMeanReversion Node
Measures speed of price reversion to mean
Overview
Half-life mean reversion quantifies how quickly prices revert to their mean after a deviation. A short half-life (fast reversion) means prices return to equilibrium quickly - ideal for mean reversion strategies. A long half-life (slow reversion) suggests prices will stay deviated for extended periods - avoid mean reversion trades.
This metric is crucial for timing mean reversion trades and position sizing. If half-life is only 2 bars, you need very precise entry timing. If half-life is 20 bars, you have flexibility in entries. Combining half-life with spread magnitude determines the risk/reward of pairs trades.
Formula & Calculation
Half-Life = 20 bars: Same reversion takes 20 bars (slower, harder to trade)
Parameters
| Parameter | Default | Description |
|---|---|---|
| lookback | 20-100 | Period for regression calculation |
| mean_type | SMA | Method for calculating mean (SMA or EMA) |
Common Use Cases
1. Mean Reversion Setup Validation
Only take mean reversion trades when half-life < 10. Longer half-lives indicate weak or broken mean reversion.
2. Position Sizing
Shorter half-life = more aggressive sizing. Longer half-life = reduce size dramatically. Manage position size inversely to half-life.
3. Exit Timing
Target exit at 1-1.5x half-life bars. If half-life is 5, expect mean reversion around 7-8 bars. Exit sooner if target reached.
4. Pairs Trading Verification
Calculate half-life of spread between two cointegrated stocks. Confirms whether mean reversion will work in timeframe.
Advantages & Limitations
Advantages
- Quantifies reversion speed
- Enables dynamic positioning
- Risk-aligned exit timing
- Directly actionable for trading
Limitations
- Assumes mean reversion exists
- Can be unstable over time
- Lookback period dependent
- Breaks in trending markets