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Trading Strategies

Mean-Reversion Strategy For SPY, QQQ and TLT

This is a simple mean-reversion strategy for trading a portfolio consisting of SPY, QQQ and TLT ETFs based on price breakouts.

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. We highly recommend this data service (we do not have a referral arrangement with the company.)

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Backtest settings

Timeframe: Daily (adjusted data)
Markets: SPY, QQQ, TLT
Strategy type: Long-only mean-reversion
Maximum positions: 2
Position size:  equity/2
Commission: $0.005/share
All trades are executed at the open of the next bar
Backtest range: 01/2/2002 –09/23/2021

Note that the strategy is not optimized for highest annualized return.

Equity curve (green) and comparison to SPY total return (red)

Performance summary

STRATEGY SPY BUY AND HOLD
CAGR 8.5% 10.9%
MDD -13.6% -55.2%
VOLATILITY 9.6% 18.7%
SHARPE 0.89 0.58
TRADES 634
WIN RATE 71.3%
AVG. BARS IN TRADE 7.4
EXPOSURE 21.4% 100%

Strategy CAGR is 8.5% versus 10.9% for buy and hold. Maximum drawdown of the strategy is 13.6% versus 55.2% for buy and hold. Sharpe of the strategy is 0.89 versus 0.58 for buy and hold. Volatility of the strategy is nearly half of that of buy and hold: 9.6% versus 18.7%.

Average holding period is 7.14 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 10.2% from 8.5% but maximum drawdown increases to about 35%. Therefore, the filter is not used to achieve CAGR outperformance but limits drawdown risk.

Only one ETF 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 –09/23/2021

Equity curve (green) and comparison to SPY total return (red)

Performance summary

STRATEGY SPY BUY AND HOLD
CAGR 10.9% 10.9%
MDD -14.4% -55.2%
VOLATILITY 12.04% 18.7%
SHARPE 0.91 0.58
TRADES 408
WIN RATE 70.6%
AVG. BARS IN TRADE 7.6
EXPOSURE 28.1% 100%

Strategy CAGR matches that of buy and hold but at much lower maximum drawdown and volatility. Sharpe of the strategy is 0.91 versus 0.58 for buy and hold. Average holding period is 7.6 days. If the bear market filter is removed, CAGR jumps to 12.7% from 10.9% but maximum drawdown increases to about 36.4%.

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.

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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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