They buy on oversold and sell on overbought. Long only.
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This is telling us that for the last 10 years the market has changed and has become mean reverting. Notice that for the period , it has not performed as badly as expected. Others on the blog-o-spere have mentioned this : Mean-reverting strategies have not performed as well starting So knowing what we now know, how would an adaptive strategy work.
The Master strategy Includes: A. If it crosses below, sell.
Allocation Rules: We measure risk adjusted performance for the last bars for each of the 7 strategies. In the second pane, the graph represents positions taken by the trend-following strategy.
But What Is Mean Reversion?
In the third pane, the graphs represent positions taken by the various mean reverting strategies. The way the performance of both mean reverting and trend following strategies are analyzed side-by-side is really eye opening.
On a regular basis, traders should perform a statistical analysis of their past X trades to determine if each trading system is still working. As Howard Bandy would say, in relation to a trading system you have to ask yourself "Is it broken? If it is broken, stop trading it. You can still monitor paper trades to determine if the system starts working again.
Intro To Mean Reversion
By engaging in this process, you have an adaptive trading strategy. It's great to see an actual tangible and testable system posted on a blog, rather than all the usual untestable nonsense that is allover the Internet.
My experiments have shown me that mean reversion works on indices which are driven by speculators buying low and selling high and therefore constantly become over bough and over sold and then 'correct' themselves as they revert back to their means. Whilst currencies are driven by government and central bank polices more than anything else and therefore trend in the long-term.
Nice post. Interesting how even a composite system mean reversion and trend following experiences lengthy drawdowns up to three years. Thanks for a great read.
Every one has to made investments according to his financial possibilities, of course, and advices he may get from not involved advisors. Markowitz listed one of the reasons for trend following persisting as the inability for arbitrageurs to get rid of it commissions, other costs. That statement made me think of this analysis that you posted here.
Well, decimalization came to the NYSE in MR was finally exploitable on a short term basis. An thus the picture we see above.
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My hypothesis anyway. Now, low commissions, on a relative basis to the equity markets, have been a fact in the futures markets forever. And trending has survived there. My sense is we saw a shift in equities because of the market structure shift, and that it will stabilize again once the MR money is arbed out — which it appears to be doing.
Basics of Mean Reversion Strategies by Dr. Ernest P Chan
Grateful to check out your website, I seem to be ahead to more excellent sites and I wish that you wrote more informative post for us. Well done work.
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Yes, add me to your mailing list. Mean reversion strategies have been very popular since Some use the RSI indicator, some use a short term simple moving average, some use boillinger bands, etc.
Anyway, thought I'd share a connection to you past work. BTW, you should still post insights here despite being with LogicInvest. Moskowitz, not Markowitz… Reply.