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Dow 30 Weekly Mean-Reversion Strategy

We apply the PSI5 mean-reversion algo to Dow 30 stocks in the weekly timeframe. Since 2000 the strategy has outperformed S&P 500 total return on both absolute and risk-adjusted basis with and without a stop-loss.

Weekly mean-reversion signals for Dow 30 stocks are included in Weekly Signals and in Weekly Market Analysis.

With only one parameter adjustment in the PSI5 algo we use for daily mean-reversion with Dow 30 stocks we applied it in the weekly timeframe. Below are the results for all 30 Dow stocks with a 2% stop-loss and without it.

Portfolio backtest settings

Time-frame: weekly (adjusted data)
Strategy type: Mean-reversion, long-only
Score based on: PSI5
Universe: Dow30 stocks (current composition)
Backtest period: 01/03/2000 – 10/25/2017
Maximum open positions: 20
Commission per share: $0.01
Position size per stock: Available equity/20
Trade entry: Open of next bar after entry signal (no look-ahead bias)
Trade exit: Open of next bar after exit signal or 2% stop-loss (no look-ahead bias)

Performance summary

In the results below we compare the performance of the weekly strategy without and with stop-loss to buy and hold and also to daily mean-reversion based on PSI5

Parameter No stop-loss 2% stop-loss SPY B&H Daily
CAGR 9.29% 7.12% 5.15% 7.51%
Max. DD -34.4% -24.4% -55.2% -19.8%
Sharpe 0.46 0.43 0.26 0.59
MAR 0.27 0.29 0.09 0.37
Win rate 66.8% 61.7% 66.8%
Trades 6275 6638 11028
Avg. Trade 0.55% 0.40% 0.36%
Avg. bars 2.86 2.36 6.69
Profit factor 1.51 1.30 1.39

Note that the strategy without stop-loss was down 11.7% in 2008 and without stop-loss it was down 4.2%. Drawdown can only be decreased without curve-fitting by switching to daily timeframe. The daily strategy gained 4.6% in 2008.

Below are the equity curve, monthly returns and Monte Carlo simulation for the weekly strategy without stop-loss.

The probability of a drawdown greater than 14% is less than 1%.

Below are the equity curve, monthly returns and Monte Carlo simulation for the weekly strategy with 2% stop-loss.

The probability of a drawdown greater than 13.5% is less than 1%.

Below are the equity curve, monthly returns and Monte Carlo simulation for the daily strategy without stop-loss.

The probability of a drawdown greater than 7.5% is less than 1%.

The signals of the weekly mean-reversion strategy are included in our Weekly Market Analysis. Click here for a sample report and weekly mean-reversion signals at the end.

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. http://www.amibroker.com

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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