Digging Up An Old Trading System From The Graveyard - Part 1
Examining a Mean Reversion System with 1.5 Years of Positive Forward-Tested Out-Of-Sample Performance
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Introduction:
I was digging through my folders the other day when I stumbled across a handful of mean reversion strategies that I had forgotten about. It was like finding buried treasure, except it was buried deep in my folders rather than in the ground. I couldn’t remember when I developed these strategies or where I had gotten the ideas from. Luckily the files were timestamped, which showed it has been over a year since these strategies had been touched.
There were two strategies in particular that I found to be quite interesting. In this article I want to focus on one of those two strategies (maybe in a different article we can focus on the other strategy).
What I want to accomplish in this article is:
Share the current starting point of the strategy and what the forward tested out-of-sample incubation looks like.
Then I want to tear the strategy apart to understand its core components
I want to ensure there are not any misses or new learnings that need to be incorporated into the strategy.
Then I want to try to improve the strategy further (if possible)
Then we’ll piece the strategy back together
Hopefully when it’s all said and done we have a new strategy that we can add to our database.
The Hidden Treasure Strategy:
The strategy that I stumbled across was a short-term mean reversion system. The strategy trades mega-cap stocks, only buying oversold conditions on stocks that are trending.
The system enters positions using a limit order. The system exits when the high is above the previous day’s high, or the position has been held for 10 days.
The system holds up to 10 positions. If more setups exist than the 10 slots, the system ranks and prioritizes stocks that have increased the most over the previous year.
See below for the detailed list of system rules: