Half-Life (Mean Reversion)
The estimated time it takes for a spread or price deviation to revert halfway back to its mean — a measure of how quickly mean reversion occurs.
Explained Simply
Half-life is calculated from the Ornstein-Uhlenbeck process and tells you the speed of mean reversion. A half-life of 10 days means a deviation from the mean is expected to close by 50% in 10 days. For pairs trading, the ideal half-life is 5-30 days — fast enough to be tradeable but not so fast that you can't enter the position. A half-life of 100+ days means mean reversion is too slow to be practical. A half-life of 1-2 days might be too fast for human traders but fine for algorithms.
How Tradewink Uses Half-Life (Mean Reversion)
Half-life is a critical filter for pairs trade eligibility. The PairsTrader module calculates half-life for every cointegrated pair and only generates signals for pairs with half-lives between 5 and 30 days. This ensures trades have a reasonable holding period and that the spread will revert quickly enough to justify the capital allocation.
Related Terms
See Half-Life (Mean Reversion) in action
Tradewink uses half-life (mean reversion) as part of its AI trading signal pipeline. Start getting signals that use this concept to find real opportunities.