Category: Mean Reversion
Dec 09, 2021
in Relative Strength, Mean Reversion, Regime Change
This example employs a simple credit spread style ratio to define the prevailing risk on / off regime and uses that to switch between different strategies.
When the High Yield / Treasury ratio is trending upwards (i.e. short MA above long MA) the backtest pursues a mean-reversion strategy, investing in the weakest short-term performers (buying wholesale) in a list of broad U.S. equity ETFs.
Conversely, when the HYG / IEI ratio trends down (short MA below long MA), the backtest switches to a Relative Strength strategy; buying the top five from a list of mixed asset class ETFs. Selecting the strongest five securities from the list provides some diversification while also giving the backtest the opportunity, in bear markets, to allocate 80% to fixed income and, in the most severe periods, to avoid equities entirely.
Specific parameters and ETFs are not the focus of this example, rather, it is intended to highlight the backtest functioanlity and to provide a starting point for subscribers to further research and develop.
Feb 15, 2021
in Backtest, Mean Reversion, Video, Sequential RS
Note: during the launch of our new application called Sequential Relative Strength, we are allowing all accounts to create portfolios using individual stocks. This app module is able to expand on the core Portfolio Relative Strength and add a 2nd stage to help improve entry points.
Reviewing some recent actual trading from the lens of some of our backtesting applications. This has been a very good market environment for ETF rotation. #STUDY
to expand video on screen, click the '4 expanding arrows' icon in the bottom right corner of the video screen. Use the settings icon to change to 1080 quality if it seems at all blurry
Jun 10, 2020
in Mean Reversion, Regime Change
Late last year we produced a video that showed how two different strategies, relative strength and mean reversion, could be layered on top of each other. That example went through each of the constituent backtests separately, in order to explain the mechanics of the process.
The example below shows how such a dual-layered strategy can be run in a single backtest. The first layer employs the SPY / VEU ratio moving average as a regime switch to dynamically alternate between whichever is stronger; U.S. or International stocks. Then, the second layer picks the weakest short-term performer within that chosen asset class.
To keep it simple, we have used the same basic U.S. (MDY, IWM, SPY and QQQ) and international (EWA, EWC, EWH and EWS) ETFs that we have used in previous examples.
Mar 27, 2020
in Mean Reversion, TRD Total Return Diff
Related But Different ETFs:
Mar 03, 2020
in Backtest, Mean Reversion, TRD Total Return Diff
We have introduced a new backtest for subscribers that is focused on short term mean reversion. It is intended to be used with highly related securities, which are unlikely to drift apart for very long before coming back together. Consequently, when one of the securities underperforms by a non-insignificant margin, an opportunity occurs.
The backtest works by comparing the difference in the x-day Total Return between the securities / ETFs. When that x-day return difference is more than y standard deviations below the mean, the backtest will buy Security 1. It will then hold that security until it reaches z standard deviations above the mean, when it will be sold in favor of Security 2.
Suitable primarily for non-taxable accounts only, the idea is that these short-term trades among correlated assets can be used to materially enhance the returns through compounding without a material difference in the underlying beta exposure. More return not for less risk -- but for very similar risk. Said another way, taking a modicum of extra risk can be quite profitable.
Go to Total Return Difference (TRD) - Mean Reversion Backtest