Mean Reversion Strategy Journal

[StockChartist]

FWIW, I do something very similar trading Micro E-Minis S&P on the daily time frame and it is quite profitable.

Nice to hear, I haven't traded my strategy on the E-Minis as my indicators only generate approximately 2-5 entry signals per year on the daily chart of any instrument hence why I trade a universe of liquid stocks to look for the best opportunities.

 

[StockChartist]

Interesting system. My priority is capital preservation so I stay away from strategies that will suffer in a prolonged bear market.

I'm curious about the extent of the drawdown. Beating the S&P index isn't worth much if you only drop 25% when the index drops 30.

I trade a long only momo strategy with tight stops and only had minimal drawdowns. I was pretty well in cash during march of 2020.


Diversification isn't going to help much if the total portfolio is in stocks. When the market panics all stocks retreat. Not having a process to exit non performing stocks limits the effectiveness of your capital. I would think you will eventually reach a point where the majority of the portfolio is non performing.

With TradingView it's not currently possible to do back testing at the portfolio level and even if it were it would be near impossible to back test the way I'm trading in this journal, what I've referred to is individual back tests on the stock level to show the system does generate profits over time on most stocks even without adding more filters which I'm doing. The average trade lasts about 20 days so the portfolio will always have high turnover and yes some losing stocks will linger a bit longer before coming back to the mean. I'm always open to new ideas so if I saw anything that makes sense I would seek to back test it if it were possible to add some filter to reduce drawdowns but I've yet to find that in my research, imo it's like trying to have your cake and eat it too.

And you're right my account will dive much in line with the market when it retreats, there's nothing special about the stocks I'm buying it's more about each individual trade setup trying to gain a small edge there. But I guess it's up to each individual trader as to their specific goals and risk tolerance, for me I'm perfectly fine with having a drawdown in line with the market what I'm more focused on is absolute returns over time and to get high returns I know I've got to put up with a lot of short term volatility because imo volatility is the currency you use to pay for performance, so I'm not too fussed with trying to minimize drawdowns as every stop based test I've done for this has reduced overall returns and exposes you to whipsaw risk on the portfolio level. I believe there's a risk premium to be earnt for the transfer of equity volatility risk by holding throughout the inevitable market storms. A 30-50% drawdown is fine with me because long term I'm going for 10x that in returns and I don't have my entire net worth tied up in this swing trading account.

Again this isn't always suited to everybody and I know some traders using my indicators have come up with their own methods to reduce drawdowns with what they're comfortable with. I'm not claiming to have the one and only way to trade, just a strategy that suits my personality and goals.

 

[deaddog]

A 30-50% drawdown is fine with me because long term I'm going for 10x that in returns and I don't have my entire net worth tied up in this swing trading account.

Again this isn't always suited to everybody and I know some traders using my indicators have come up with their own methods to reduce drawdowns with what they're comfortable with. I'm not claiming to have the one and only way to trade, just a strategy that suits my personality and goals.

I wish you luck and commend you for posting a real money account. That's rare for a sponsor.

I developed my strategy specifically to avoid the big draw downs. What concerns me about how this one operates is that it seems to limit the upside and has no limit on the downside.

Hope it works for you.

 

[StockChartist]

I wish you luck and commend you for posting a real money account. That's rare for a sponsor.

I developed my strategy specifically to avoid the big draw downs. What concerns me about how this one operates is that it seems to limit the upside and has no limit on the downside.

Hope it works for you.

Thank you for your support, much appreciated. Yes you're right about the risk/reward profile differing from yours and there's nothing wrong with your approach I actually run trend following strategies too and find that you have to pay for that convexity with drawdowns and long periods of underperformance too, you could say my strategy that I'm using here has a similar risk/reward profile to selling puts, or writing equity volatility risk. Hope you stay tuned in!

 

[deaddog]

I actually run trend following strategies too and find that you have to pay for that convexity with drawdowns and long periods of underperformance too,

I haven't experienced much in the way of drawdowns. I'm long only, so when the market is in a down trend, I'm sitting in cash. Because I don't suffer significant drawdowns, that more than makes up for when I underperform in a raging bull market.

I suspect your system will underperform in a raging bull market because you limit your gains.

 

[StockChartist]

I haven't experienced much in the way of drawdowns. I'm long only, so when the market is in a down trend, I'm sitting in cash. Because I don't suffer significant drawdowns, that more than makes up for when I underperform in a raging bull market.

I suspect your system will underperform in a raging bull market because you limit your gains.

Whatever you're doing or the filter you've found sounds great being able to avoid market drawdowns and still participate in the upside, I have yet to find such a strategy. The only similar thing that comes to mind is a index filter for a trend following strategy, for example when $SPX is under the 50 day MA then don't initiate any new stock buys until it's back above, I have seen that reduce drawdowns in back tests but the future is unknown and I think that method is susceptible to whipsaw risk going forward plus I have yet to find a robust short-only strategy for an index and that's effectively what an index filter is doing, trying to time the market on the downside, sounds great but it's not applicable to my strategy here as I believe even in a prolonged bear market or sideways market my strategy can still produce returns because of the high turnover and short duration of trades, it's just the transition from one market regime into another that hurts. And I don't think that my strategy will underperform in a raging bull market just because each trade has a profit target limit order in place, however time will tell and hence why I'm running this journal.

 

[deaddog]

Whatever you're doing or the filter you've found sounds great being able to avoid market drawdowns and still participate in the upside, I have yet to find such a strategy. The only similar thing that comes to mind is a index filter for a trend following strategy, for example when $SPX is under the 50 day MA then don't initiate any new stock buys until it's back above, I have seen that reduce drawdowns in back tests but the future is unknown and I think that method is susceptible to whipsaw risk going forward plus I have yet to find a robust short-only strategy for an index and that's effectively what an index filter is doing, trying to time the market on the downside, sounds great but it's not applicable to my strategy here as I believe even in a prolonged bear market or sideways market my strategy can still produce returns because of the high turnover and short duration of trades, it's just the transition from one market regime into another that hurts. And I don't think that my strategy will underperform in a raging bull market just because each trade has a profit target limit order in place, however time will tell and hence why I'm running this journal.

You're right about the filter. 200 simple ma. Don't initiate any position when SPY is trading below the 200ma. The rest is just finding stocks that are increasing in price, and riding the trend until it ends. The individual stocks take me out of the market when their trend ends.

Simple but effective. When the market starts to downtrend it's hard to find uptrending stocks.

 

[traider]

Please run your strategies over 2008 and covid period. You have backtests on the first page so this should be easy to do. Discretion can be exercised later but you should show how the automated version performs over bear market and not cherry pick

 

[StockChartist]

You're right about the filter. 200 simple ma. Don't initiate any position when SPY is trading below the 200ma. The rest is just finding stocks that are increasing in price, and riding the trend until it ends. The individual stocks take me out of the market when their trend ends.

Simple but effective. When the market starts to downtrend it's hard to find uptrending stocks.

Nice one, the only thing with this if the market goes into a prolonged bear market you could be in cash for several years or longer most of the time with plenty of false starts, for example the Nikkei for most of the early 90s spent most of the time under the 200ma.

 

[StockChartist]

Please run your strategies over 2008 and covid period. You have backtests on the first page so this should be easy to do. Discretion can be exercised later but you should show how the automated version performs over bear market and not cherry pick

I didn't cherry pick, I've ran backtests for the same stocks on the first page from 2008 until now and they all recovered fine after 2008 and covid with most ending the 2008 year with a profit, $FB wasn't around then so I tested $AAPL instead and $BAC didn't show results for some reason so I used similar stock $JPM and that showed a profit in 2008 too. The indicators only trigger several entry signals per year per stock with an average trade length around 20 days and yes during bear markets there will be more losses as there are with all long-only strategies, and I'm fine with that.

$MCD 2008-2021 Back test Results

$WMT 2008-2021 Back test Results

$JPM 2008-2021 Back test Results

$INTC 2008-2021 Back test Results

$AAPL 2008-2021 Back test Results