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Mean-Reversion Strategy For SPY and QQQ ETFs

Photo by Burak The Weekender.

The long-only mean-reversion strategy for trading SPY and QQQ is based on two popular indicators.

The strategy rules are available with a purchase of the strategy bundle. 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).

Backtest settings

Name of strategy: MRFREE
Timeframe: Daily (adjusted data)
Markets: SPY and QQQ ETFs
Strategy type: Long-only mean-reversion
Position size:  100% of available equity.
Commission: $0.01/share
Execution: All trades are executed at the open of the next bar
Backtest range:  01/29/1993 – 06/14/2023 (SPY) and 01/2/2002 –06/14/2023 (QQQ)

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

SPY: Equity curve, yearly returns, drawdown profile, and histogram of daily returns 

There are only two losing years. The annualized return is 10.5%, and Sharpe is 0.68.

QQQ: Equity curve, yearly returns, drawdown profile, and histogram of daily returns 

There are four losing years. The annualized return is 11.8%, and Sharpe is 0.61.

Performance Summary

CAGR 10.5% 11.8%
MDD -27.4% -29.5%
VOLATILITY 12.4% 19.2%
SHARPE 0.85 0.61
TRADES 732 548
WIN RATE 68.6% 66.1%
EXPOSURE 14.8% 15.6%

Strategy rules

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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