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Mean-Reversion Strategy For Dow 30 Stocks

The trading strategy is based on the PSI5 mean-reversion algo and  trades Dow 30 stocks in daily timeframe.

For the backtests in this article we used Norgate data for Dow 30 index that include current and past constituents to remove survivorship bias. We highly recommend this data service to those who would like to remove survivoship bias from backtests (we do not have a referral arrangement with the company.)

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The strategy is based on our mean-reversion PSI5 algo. This algo is not data-mined but based on a formula from a text in probability theory and is available for sale to professional traders and hedge funds after signing a non-disclosure agreement.

Dow 30 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 (delistings handled in backtest)
Backtest period: 01/03/2000 – 10/22/2020
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)
Stop-loss: None

Performance summary

Parameter Strategy Buy and hold SPY (TR)
CAGR 6.9% 6.1%
Max. DD -26% -55.2%
Sharpe 0.51 0.31
Trades 23421 1
Win rate 63.6%
Payoff ratio 0.71
Profit factor 1.23
Avg. bars in Trade 4.2
Exposure 23% 100%
2000 return 11.0% -8.6%
2002 return  -1.5% -21.6%
2008 return 15.5% -36.8%
2020 Max. DD -26% -34%

Equity curve, monthly returns and drawdown profile

Since January 3, 2000, the strategy has outperformed SPY total return on an absolute and risk-adjusted basis. CAR for the strategy is 6.9% versus 6.1% for SPY total return. Note that strategy performance relative to a benchmark always depends on starting date.

In addition, the strategy has outperformed SPY total return by a wide margin during high stress periods such as the dot com and 2008 bear markets. The strategy gained 15.4% in 2008 versus a 36.2% loss for SPY total return.

The PSI5-based strategy has generated 23412 trades since 2000 and there is no survivorship bias because in the backtest we considered only those stocks that were part of the index at the time of the signals.

This strategy can be implemented with PSI5 mean-reversion algo.


Charting and backtesting program: Amibroker

Data provider: Norgate Data

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