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Institutional Grade Mean-Reversion Strategy

The strategy trades all Dow 30 stocks in short-term mean-reversion mode using as a score a formula from a probability theory textbook.

Updated: June 13, 2019

The strategy goes long-only Dow 30 stocks and uses as score our proprietary PSI5 algo, which is based on a formula from a text in probability theory. The logic of this strategy is available for sale to professional traders and hedge funds subject to acceptance of a non-disclosure agreement.

A maximum of 30 open positions are held at a time. The strategy shows superior absolute and risk-adjusted returns in backtest mode. Note that this is not a data-mined strategy but it is based instead on a mathematical model of stock price action. No leverage in used in the results.

Portfolio backtest settings

Strategy: MRDOW
Time-frame: Daily (adjusted data)
Strategy type: Mean-reversion, long-only
Score based on: PSI5
Market correction filter: None (all signals taken even during corrections)
Universe: Dow 30 stocks
Backtest period: 01/03/2000 – 06/13/2019
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 MRDOW Buy and hold
CAGR 6.8% 5.4%
Max. DD -19.7% -55.2%
Sharpe 0.58 0.28
MAR 0.34 0.10
Trades 11672 1
Win rate 66.8%
Profit factor 1.36
Avg. bars in Trade 6.7
Exposure 45% 100%

The strategy shows 0.34 MAR (CAR/Max. DD) versus 0.10 for SPY total return buy and hold and clearly outperforms the benchmark on a risk-adjusted basis but also in absolute returns terms. The strategy gained 3.1% in 2008 and +15.2% in 2011. There were only two losing years and largest loss was -3.7% in 2002.

Backtest results (Click on image to enlarge.)

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


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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.

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