Quote from Trader13:
So using your chart to time or size your trades, you are effectively using the equity curve as a mean reversion indicator. Interesting approach which I've come across before though not often. I wonder if the fact that these trades are seasonally based makes mean reversion more likely for the equity curve than any other fundamental or technical basis. Hmmm, I'll have to give that some more thought.
Another way to think about it is that if you assume my 2.5 years of data I used to generate the performance graph is representative of seasonal spreads in general, then the graph is proof that they are cyclical. There are of course assumptions that I made and MRCI makes implicit in the process.
But in general it is nothing but a graph of one slice of human behavior that I think we all have experienced. We feel euphoric when our accounts run up fast and daydream of opening a hedge fund.
Your account starts to move into a drawdown and you are too slow to realize it or you think it just a short pause, then you feel like a loser because you realize you're not good enough to run a hedge fund anymore!
So when entire groups of people are doing this in sync we get cycles in the market because not everybody is euphoric and they take advantage.
Maybe MRCI is trying to include psychology in their recommendations, but generally they appear to be methodically generated. If that's the case it is up to me to control my emotions to improve my performance and also to try to measure/determine what cycles are in the market and try to take advantage of them.
Quote from Trader13:
I was thinking about whether seasonal spreads are more inclined to have mean-reverting equity curves than other trading approaches. I have concluded that any system with approx 50/50 wins/losses that repeat with regular frequency would exhibit this tendency. Seasonal's may fit this profile over some time periods, but I can't think of any special attribute that would make the seasonal equity curve more or less mean-reverting than other approaches.
I can't speak to whether or not seasonals spreads are more apt to revert to mean than other markets, but they appear to be there.
As to mean reversion for the equity curve more/less likely than fundamentals or technicals, I would say the equity curve is simply another technical measurement that displays the cumulative effect of the trading system that generates it and the algorithms/methods within the system. The system could be fundamental or technical or both.
One might also argue that every market and/or trading system is mean reverting otherwise we would find markets that don't revert back to mean and be profitable to everyone. Perhaps the exception to this would be shorting stocks of poorly run companies....
