This is a simple mean-reversion strategy for trading Dow 30 stocks based on price breakouts. The strategy has outperformed SPY ETF annualized return and has Sharpe of about 1. The strategy details are available to All in One premium content subscribers who renew their subscription for three months or to new subscribers for six-month initial subscription. Contact us for details. This offer may end at any time.
For all backtests in this article we used Norgate data for Dow 30 index that include current and past constituents. We highly recommend this data service (we do not have a referral arrangement with the company.)
Timeframe: Daily (adjusted data)
Index: Dow 30 (current and past constituents)
Strategy type: Long-only mean-reversion
Maximum positions: 5
Position size: equity/5
All trades are executed at the open of the next bar
Backtest range: 01/29/1993 –06/23/2021
- The length of the backtest matches the history of SPY ETF to have a fair comparison.
- The strategy is not optimized for highest annualized return.
Equity curve (green) and comparison to SPY total return (red)
|STRATEGY||SPY BUY AND HOLD|
|AVG. BARS IN TRADE||7.1||–|
Strategy CAGR is 13.3% versus 10.4% for buy and hold. Maximum drawdown of the strategy is 20.6% versus 55.2% for buy and hold. Sharpe of the strategy is 0.95 versus 0.55 for buy and hold.
Average holding period is 7.1 days and exposure is 34.3%. The strategy uses a bear market filter because it operates in the daily timeframe and during bear markets there are much better strategies to use with index ETFs, for example the PSI5 strategy. If the filter is removed, CAGR jumps to 18% from 13.3% but maximum drawdown increases significantly. Therefore, the filter is not used to achieve CAGR outperformance but limits drawdown risk and also the annualized return.
The table below shows the results for CAGR and maximum drawdown % for maximum positions varied from 1 to 30 in increments of 1.
For 5 maximum positions CAGR is not highest and drawdown is not lowest. As the number of maximum open position increases, CAGR and maximum drawdown decrease.
The description of the strategy is available below to All-in-One premium subscribers with subscriptions expiring after July 23, 2021. Contact us to unlock the restricted content. If your subscription expires before that date you may renew for the access.
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.
Charting and backtesting program: Amibroker. Data provider: Norgate Data