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 Tuesday, December 31, 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. There are no bear market filters. The logic of this strategy is available for sale to professional traders and hedge funds subject to acceptance of a non-disclosure agreement.
For the backtests in this article we used Norgate data for Dow 30 index that also include current and past constituents to remove survivorship bias. In the backtest the strategy traded the stocks that were part of the index at the time of the signals.
A maximum of 30 open positions are held at any given time. 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: Dow 30 mean-reversion based on PSI5 algo
Time-frame: Daily (adjusted data)
Strategy type: Mean-reversion, long-only
Bear market filter: None (all signals taken even during corrections)
Universe: Dow 30 stocks
Backtest period: 01/03/2000 – 12/31/2019
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 | Strategy | Buy and hold |
| CAGR | 6.7% | 6.0% |
| Max. DD | -23.5% | -55.2% |
| Sharpe | 0.88 | 0.29 |
| Trades | 22545 | 1 |
| Win rate | 63.6% | – |
| Profit factor | 1.23 | – |
| Avg. bars in Trade | 4.2 | – |
| Exposure | 47% | 100% |
The strategy has 6.7% CAGR versus 6% for SPY total return buy and hold and outperforms the benchmark on risk-adjusted basis with less than half the drawdown The strategy gained 15.4% in 2008 and 4% in 2011. Largest annual loss was 2.9% in 2018.
Backtest equity curve (Log scale, Click on image to enlarge.)
Maximum drawdown occurred in 2008. Since 2010 drawdown is less than 16%.
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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