Alternative Ways Of Trading Four Mean Reversion Strategies

In a previous article we discussed two different ways of trading multiple mean-reversion strategies. In this article we consider more options based on the number of concurrent signals generated by the strategies.

In an article last month we considered two ways of trading the signals generated by the four mean-reversion long-only strategies in SPY ETF:  Equal capital allocation of 25% and FEFX (take the first entry and the first exit.)

In addition to the above two ways, in this article we consider the following conditions for establishing long entries:

  1. Two or more concurrent signals (> 1)
  2. Three or more concurrent signals (> 2)
  3. All strategies generate concurrent signals (= 4)

Note that 1 or more concurrent signals is equivalent to FEFX and 4 or more concurrent signals is equivalent to No 3 above, i.e., long entry occurs only when all strategies generate a signal at the same time. Also, an exit occurs in all cases when any exit from any of the four strategies is triggered.

Below is a table of performance of the various alternatives. Backtests include $0.01 per share commission. Equity is fully invested.

Parameter FEFX > 1 > 2 ALL  25%
CAR 6.7% 9.47% 7.93% 6.81% 9.15%
Max. DD -27.6% -21.5% -22.1% -11.1% -22.05%
Sharpe 0.49 0.77 0.78 0.82 0.77
MAR 0.25 0.44 0.36 0.61 0.42
Win rate 58.5% 66.7% 71.6% 74.8% 69.1%
Trades 1080 697 402 214 2008
PF 1.30 1.83 2.21 3.62 1.84
Payoff 0.96 0.92 0.87 1.22 0.83
Avg. bars 3.3 3.5 3.6 3.5 5.5
Exposure 43% 29% 17% 7% 36%

There are some choices depending on risk profile. For example, if someone is looking for minimum exposure, then “ALL”, i.e., entry signals when all four strategies generate a signal at the same time, is a good choice since it has been in the market only 7% of the time. At the same time, this strategy offers the lowest maximum drawdown, highest MAR (CAR/Max. DD), win rate and profit factor. I always prefer higher win rate strategies since risk of ruin is lower. All but the first, “FEFX”, have attractive win rate so that is not a major deciding factor. In my particular case, the choice seems to be between “> 1” and ALL.

Below are equity curves and monthly returns tables for the five alternative ways of trading the four mean-reversions strategies.

Note that mean-reversion trading carries high risk since there are no stops. Most traders allocate to it only a small percentage of available capital in the range of 5% to 10% and some leverage it accordingly. Please read this disclaimer.

If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY

Subscribe via RSS or Email, or follow us on Twitter.

Charting and backtesting program: Amibroker

Technical and quantitative analysis of Dow-30 stocks and 30 popular ETFs is included in our Weekly Premium Report. Market signals for longer-term traders are offered by our premium Market Signals service. Mean-reversion signals for short-term SPY traders are provided in our Mean Reversion report.

Copyright Notice 

Disclaimer

This entry was posted in Quantitative trading and tagged , . Bookmark the permalink.

Leave a Reply