This is a simple strategy for trading Dow 30 stocks with no parameters to optimize and no filters. The strategy has outperformed SPY ETF annualized return since inception by a wide margin with a Sharpe of more than 1. Updated: September 22, 2023.
For all backtests in this article we used Norgate data for Dow 30 index that includes 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 open positions: 10
Position size: equity/10
Commission: $0.005/share
All trades are executed at the open of the next bar
Backtest range: 01/02/1993 –09/22/2023
Comments
- The backtest starts in 1993 to allow a sufficient sample.
- The strategy has no parameters and no price action filters.
Equity curve, yearly returns, and drawdown profile.
Performance Summary
| STRATEGY | |
| CAGR | 17.3% |
| MDD | -30.5% |
| SHARPE | 1.00 |
| VOLATILITY | 17.3% |
| TRADES | 10,997 |
| WIN RATE | 65.5% |
| AVG. BARS IN TRADE | 6.9 |
| EXPOSURE | 82.5% |
The strategy CAGR is 17.3%. The maximum drawdown of the strategy is -30.5%. The Sharpe of the strategy is 1.00 versus 0.53 for buy and hold in the same period.
The average holding period is 6.9 days and exposure is 82.5%. The strategy has generated about 11,000 trades in the test period. In 2022 the strategy gained 6.7% versus a loss of 18.5% for SPY ETF.
SPY ETF Performance
Below is the equity curve with yearly returns, and the drawdown profile, when using the B2S2 strategy to trade SPY ETF from inception to September 22, 2023.
This simple long-only strategy gained 1.7% in 2022, versus a loss of 18.5% for SPY ETF, and is up 19.4% year-to-date. The annualized return is 8.8%, the win rate is 68.7%, and the number of trades is 614 since the inception of the SPY ETF.
The rules of the strategy are available separately or as part of a bundle of six strategies. Contact us for more details and price. Instructions for unlocking the restricted content below are emailed after payment is received.
Click here for a list of strategies.
About the risks of mean-reversion strategies
Mean-reversion methods are risky since the trades typically go against the short-term trend, and stop-loss orders cannot be employed efficiently because, in the majority of instances, they destroy profitability.
Mean-reversion strategies are only good for experienced traders who know how to manage risk and are willing to take on big risks.
When using a profitable mean-reversion strategy, inexperienced traders may lose money because they are afraid to act on signals that are risky at first but pay off in the long run.
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
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