# Short and Long-Term Reversal > Reversal effects describe recent losers beating recent winners over very short and very long horizons. Learn the evidence, the causes and the link to momentum. Source: https://learn.tradelabsai.com/research/short-and-long-term-reversal/ Track: Research and Backtesting · Level: Advanced · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Short and Long-Term Reversal", https://learn.tradelabsai.com/research/short-and-long-term-reversal/ Momentum says winners keep winning over the medium term. But at the very short horizon, up to about a month, and at the very long horizon, three to five years, research has found the opposite: past losers tend to outperform past winners. These reversal effects bracket momentum in time, and they explain why momentum strategies skip the most recent month and why value investing has long horizon roots. Understanding all three horizons helps traders avoid applying the right idea at the wrong timescale. ## The return horizon map | Horizon | Typical pattern in stocks | Lesson | |---|---|---| | Days to about one month | Short term reversal | This lesson | | 3 to 12 months | Momentum | [Momentum Factor](https://learn.tradelabsai.com/research/momentum-factor/) | | 3 to 5 years | Long term reversal | This lesson | ## Short term reversal - **Jegadeesh (1990)** and **Lehmann (1990)** found that stocks with the lowest returns over the past week or month tended to outperform the following week or month, and the best performers tended to underperform. - The effect is strongest in small, illiquid stocks and around non news price moves. ### Why it happens | Explanation | Idea | |---|---| | Liquidity provision | Large trades push prices away from fair value; prices bounce back once the pressure passes, rewarding traders who provide liquidity. See [Liquidity Factor](https://learn.tradelabsai.com/research/liquidity-factor/) | | Bid ask bounce | Trades alternate between bid and ask prices, creating artificial negative autocorrelation. See [Autocorrelation and Partial Autocorrelation](https://learn.tradelabsai.com/math/autocorrelation/) | | Overreaction | Investors overreact to short term noise | **Example: A one month reversal portfolio** Each month, rank 1,000 stocks by their past month return. Buy the bottom 10% and short the top 10%. Historically, such portfolios earned positive gross returns, but with turnover often above 1,000% a year, trading costs consumed most or all of the profit for all but the most efficient traders. Researchers have found that reversal is stronger when based on price moves without news and weaker after news events, where moves tend to continue. See [Signal Turnover, Breadth and Neutralization](https://learn.tradelabsai.com/research/signal-turnover/). ## Long term reversal - **De Bondt and Thaler (1985),** in "Does the Stock Market Overreact?", found that stocks with the worst returns over the previous three to five years outperformed the best performers over the following three to five years. - The effect overlaps heavily with the value factor: long term losers tend to become cheap. See [Value Factor](https://learn.tradelabsai.com/research/value-factor/). ### Why it happens | Explanation | Idea | |---|---| | Overreaction | Investors extrapolate past performance too far, then correct | | Risk | Long term losers may be riskier, distressed firms | | Value overlap | Long term losers become cheap, capturing the value premium | ## Reversal and momentum together The three horizon pattern helps reconcile the evidence: 1. **Short term:** prices overshoot due to trading pressure and noise, then partly reverse. 2. **Medium term:** news and fundamentals diffuse slowly, so trends persist. 3. **Long term:** extrapolation goes too far, and valuations correct. This is why the standard momentum signal uses returns from 12 months ago to 1 month ago, skipping the reversal month. See [Momentum Factor](https://learn.tradelabsai.com/research/momentum-factor/). ## Reversal in other markets | Market | Pattern | |---|---| | Futures and currencies | Short term reversal is weaker; time series momentum dominates medium horizons. See [Trend Following](https://learn.tradelabsai.com/strategies/trend-following/) | | Crypto | Very short horizon reversals and momentum both appear, varying by period | | Intraday | Mean reversion around VWAP and after large moves without news. See [Mean Reversion](https://learn.tradelabsai.com/strategies/mean-reversion/) | ## Trading considerations - **Costs dominate short term reversal;** only low cost, fast execution can capture it. - **Distinguish news from noise:** reversal works better after moves without fundamental news. - **Liquidity matters:** the effect is biggest where liquidity is thin, which raises costs and capacity limits. See [Alpha Capacity and Crowding](https://learn.tradelabsai.com/research/alpha-capacity-and-crowding/). ## Frequently asked questions ### What is short term reversal? The tendency for stocks with the worst returns over the past week or month to outperform, and recent winners to underperform, in the following weeks. ### What is long term reversal? The tendency for stocks with poor returns over three to five years to outperform past winners over the next several years, overlapping with value. ### Why does momentum skip the most recent month? Because short term reversal over the latest month works against momentum, so excluding it improves the momentum signal. Next, learn what happens when too many investors chase the same factors in [Factor Timing, Crowding and Crashes](https://learn.tradelabsai.com/research/factor-crowding/). ## Continue learning - Next lesson: [Factor Timing, Crowding and Crashes](https://learn.tradelabsai.com/research/factor-crowding/) - Previous lesson: [Growth and Dividend Factors](https://learn.tradelabsai.com/research/growth-and-dividend-factors/) - Related: [Growth and Dividend Factors](https://learn.tradelabsai.com/research/growth-and-dividend-factors/): Growth, investment and dividend factors look at how firms grow, invest and pay shareholders. Learn the evidence, including why aggressive investors lag. - Related: [Momentum Factor](https://learn.tradelabsai.com/research/momentum-factor/): The momentum factor buys recent winners and sells recent losers. Learn how it is built, the evidence across markets, momentum crashes and how to manage them. - Related: [Mean Reversion](https://learn.tradelabsai.com/strategies/mean-reversion/): Mean reversion trades bet that prices stretched far from their average will come back. Learn the signals, z scores, examples and the risk of fading strong trends. - Related: [Autocorrelation and Partial Autocorrelation](https://learn.tradelabsai.com/math/autocorrelation/): Autocorrelation measures how a series relates to its own past values. Learn the formula, the ACF, what positive and negative autocorrelation mean and why it matters. - Related: [Liquidity Factor](https://learn.tradelabsai.com/research/liquidity-factor/): The liquidity factor captures the extra return investors demand for holding hard to trade assets. Learn how illiquidity is measured, the evidence and its risks. - Related: [Value Factor](https://learn.tradelabsai.com/research/value-factor/): The value factor buys cheap stocks and avoids expensive ones using ratios like book to market. Learn the evidence, the long drawdown and how to build it.