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Institutional Grade Mean-Reversion Strategy

The strategy trades all Dow30 stocks in short-term mean-reversion mode using as a score a formula from a probability theory textbook.

The strategy is long-only and uses as score our proprietary PSI5 algo that is based on a formula found in probability theory text. A maximum of 30 open positions are held at a time. The strategy shows superior absolute and risk-adjusted returns with no losing years since 2000 in backtest mode. Note that this is not a data-mined strategy but it is based on a mathematical model of stock price action.

 Portfolio backtest settings

Time-frame: Daily (adjusted data)
Strategy type: Mean-reversion, long-only
Score based on: PSI5
Universe: Dow30 stocks (current composition)
Backtest period: 01/03/2000 – 04/12/2017
Maximum open positions: 30
Commission per share: $0.01
Position size per stock: Available equity/30
Trade entry: Open of next bar (no look-ahead bias)

Performance summary 

Parameter PSI5 Buy and hold
CAGR 7.1% 4.6%
Max. DD -19% -55%
Sharpe 0.58 0.24
MAR 0.37 0.09
Trades 10735 1
Win rate 66.4%
Profit factor 1.37
Avg. bars in Trade 6.7
Exposure 44.5% 100%

The strategy has 0.37 MAR (CAR/Max. DD) versus 0.09 for SPY total return buy and hold and clearly outperforms passive investing in SPY on a risk-adjusted basis but also in absolute returns terms. The strategy gained 8.3% in 2008 and has not had a down year in the backtest.

Performance curves (Click on images to enlarge.)

The strategy returned 8.3% in 2008 and 15.8% in 2011. There are no losing years.

According to the Monte Carlo simulation, the probability of a drawdown larger than 8% is only about 1%.

This strategy is available for sale to hedge funds and institutional traders. Click here for the strategy section.

Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

All charts were created with Amibroker – advanced charting and technical analysis software.

Copyright notice: Any unauthorized copy, reproduction, distribution, publication, display, modification, or transmission of any part of this report is strictly prohibited without prior written permission.

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