This is a strategy for trading the Dow 30 stocks and SPY ETF, with no parameters to optimize and no bear market filters. Updated: August 1, 2023
Since SPY ETF inception, the simple strategy has outperformed the 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%. and is up 15.5% year-to-date (August 1, 2023).
We used Norgate data for the Dow 30 index, which includes current and historical constituents, for all backtests. We 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
All trades are executed at the open of the next bar
Backtest range: 01/02/1993 –08/01/2023
- The backtest starts in 1993 to allow a sufficient sample.
- The strategy has no parameters and no price action filters.
Equity curve, yearly returns, drawdown profile, and comparison to S&P 500 total return B&H
|STRATEGY||SPY BUY AND HOLD|
|AVG. BARS IN TRADE||6.9||–|
The strategy CAGR is 17.7% versus 10% for buy and hold (without dividends). The maximum drawdown of the strategy is -30.5% versus -55.2% for buy and hold. The Sharpe ratio is 1.03 versus 0.53 for buy and hold.
The average holding period is 6.9 days and exposure is 82.5%. 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 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 August 1, 2023.
This simple long-only strategy gained 1.7% in 2022, versus a loss of 18.5% for SPY ETF, and is up 21.7% year-to-date. The annualized return is 8.8%, the win rate is 69%, and the number of trades is 611 since the inception of the SPY ETF.
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