The long-only mean-reversion strategy for trading a portfolio consisting of SPY, QQQ, and TLT ETFs is based on price breakouts.
The strategy rules are available below to All in One premium content subscribers who renew their subscription for three months or to new subscribers for a 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. We highly recommend this data service (we do not have a referral arrangement with the company.) Last update: January 6, 2023.
Timeframe: Daily (adjusted data)
Markets: SPY, QQQ, TLT
Strategy type: Long-only mean-reversion
Maximum positions: 3
Position size: equity/3
Commission: $0.005/share
All trades are executed at the open of the next bar
Backtest range: 01/2/2002 –12/30/2022
Note that the strategy is not optimized for the highest annualized return.
Equity curve (green) and comparison to SPY total return (orange)
Performance Summary
| STRATEGY | SPY BUY AND HOLD | |
| CAGR | 5.1% | 7.9% |
| MDD | -8.7% | -55.2% |
| VOLATILITY | 6.6% | 19.5% |
| SHARPE | 0.78 | 0.40 |
| TRADES | 725 | – |
| WIN RATE | 70.5% | – |
| AVG. BARS IN TRADE | 7.6 | – |
| EXPOSURE | 14.8% | 100% |
Strategy CAGR is 5.1% versus 7.9% for buy and hold. The maximum drawdown of the strategy is 8.7% versus 55.2% for buy and hold. The Sharpe of the strategy is 0.78 versus 0.40 for buy and hold. The volatility of the strategy is nearly a third of that of buy and hold: 6.6% versus 19.5%.
The average holding period is 7.6 days. 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 ETFs, for example, the PSI5 strategy. If the filter is removed, CAGR jumps to 7% from 5.1% but the maximum drawdown increases to 24.6%. Therefore, the filter is not used to achieve CAGR outperformance but limits drawdown risk.
Only one position may also be held. Below are the backtest results.
Backtest settings
Timeframe: Daily (adjusted data)
Markets: SPY, QQQ, TLT
Strategy type: Long-only mean-reversion
Maximum positions: 1
Position size: Fully invested
Commission: $0.005/share
All trades are executed at the open of the next bar
Backtest range: 01/2/2002 –12/30/2022
Equity curve (green) and comparison to SPY total return (orange)
Performance Summary
| STRATEGY | SPY BUY AND HOLD | |
| CAGR | 9.2% | 7.9% |
| MDD | -18.8% | -55.2% |
| VOLATILITY | 11.9% | 19.5% |
| SHARPE | 0.77 | 0.40 |
| TRADES | 421 | – |
| WIN RATE | 70.1% | – |
| AVG. BARS IN TRADE | 7.7 | – |
| EXPOSURE | 26.2% | 100% |
The strategy CAGR is higher than that of buy and hold and at a much lower maximum drawdown and volatility. The Sharpe of the strategy is 0.77 versus 0.40 for buy and hold. The average holding period is 7.6 days. If the bear market filter is removed, CAGR jumps to 11.2% from 9.2% but the maximum drawdown increases to about 36.4%.
The rules of the strategy are available to All in One premium content subscribers who renew their subscription for three months or to new subscribers for a six-month initial subscription. Contact us for details.
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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.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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