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Institutional Grade Mean-Reversion Strategy

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

Performance updated after the market close on Friday, October 18, 2019.

The strategy goes long-only Dow 30 stocks using 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 any given time. The strategy outperforms buy and hold on both absolute and risk-adjusted returns basis. 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 based on PSI5 algo
Time-frame: Daily (adjusted data)
Strategy type: Mean-reversion, long-only
Market correction filter: None (all signals taken even during corrections)
Universe: Dow 30 stocks
Backtest period: 01/03/2000 – 10/18/2019
Maximum open positions: 30
Commission per share: $0.005
Position size per stock: Available equity/30
Trade entry: Open of next bar (no look-ahead bias)

Backtest performance summary

Parameter MRDOW Buy and hold
CAGR 8.0% 5.5%
Max. DD -19.6% -55.2%
Sharpe 0.69 0.29
MAR 0.41 0.10
Trades 11903 1
Win rate 67.4%
Profit factor 1.41
Avg. bars in Trade 6.7
Exposure 44% 100%

The strategy has 0.41 MAR (CAR/Max. DD) versus 0.10 for SPY total return buy and hold and outperforms the benchmark on risk-adjusted basis but also on absolute returns terms. The strategy gained 4.2% in 2008 and 15.6% in 2011. There was only one losing year in 2002 with -0.7% loss.

 Backtest equity curve (Log scale, Click on image to enlarge.)

Below is the backtest drawdown profile.

Maximum drawdown occurred in 2008. Since 2010 drawdown is less than 13%.

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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