This is a historically effective and profitable long-only strategy for trading the Dow 30 stocks and SPY ETF, with no parameters to optimize and no bear market filters.
Since inception, the simple strategy has outperformed SPY’s annualized return by a wide margin, with a Sharpe ratio greater than 1 when used to trade long-only Dow 30 stocks. In 2022, the strategy gained 6.7% while the SPY ETF lost 18.5%.
This simple long-only trading strategy gained 1.7% in 2022, compared to a loss of 18.5% for the SPY ETF, and is up 7.9% year-to-date.
We used Norgate data for the Dow 30 index, which includes current and historical constituents, for all backtests in this article. We strongly endorse 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 –02/07/2023
Comments
- The backtest starts in 1993 to allow a sufficient sample.
- The strategy has no parameters and no price action filers.
Equity curve, yearly returns, drawdown profile, and comparison to S&P 500 total return B&H
Performance Summary
| STRATEGY | SPY BUY AND HOLD | |
| CAGR | 17.6% | 9.5% |
| MDD | -30.5% | -55.2% |
| SHARPE | 1.01 | 0.50 |
| MAR (CAGR/MDD) | 0.58 | 0.18 |
| TRADES | 10,766 | – |
| WIN RATE | 65.6% | – |
| AVG. BARS IN TRADE | 6.9 | – |
| EXPOSURE | 40.5% | 100% |
The strategy CAGR is 17.6% versus 9.5% for buy and hold (without dividends). The maximum drawdown of the strategy is -30.5% versus -55.2% for buy and hold. The Sharpe of the strategy is 1.10 versus 0.52 for buy and hold.
The average holding period is 6.9 days, and exposure is 41%. The strategy has generated more than 10,000 trades in the test period. In 2022, the strategy gained 6.7% versus a loss of 18.5% for the 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 02/07/2023.
This simple long-only strategy gained 1.7% in 2022, versus a loss of 18.5% for SPY ETF, and is up 7.9% year-to-date. The annualized return is 8.3%, the win rate is 68.2%, and the number of trades is 629 since the inception of the SPY ETF.
The rules of the strategy (B2S2) are available separately or as part of a bundle of six strategies. Contact us for more details about the B2S2 strategy.
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.
Due to their significant risks, mean-reversion strategies are only suitable for experienced traders who understand and can effectively manage risk.
Inexperienced traders may incur losses when employing a profitable mean-reversion approach due to their reluctance to act on signals that are initially risky but ultimately profitable.
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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