Mean Reversion and the Broken Rubber Band

A common way to describe a mean reversion trade is a rubber band that stretches away and then snaps back. Something that Steve, my trading buddy, and I discuss when a trade keeps going against us is that the rubber band has broken. I have never tested that concept. Meaning after N day sell-off, are we now more likely to continue to sell off than bounce? Doing research is not always about trying to develop a new strategy but sometimes it is testing a concept. The concept may lead to a new trading idea.

May 25, 2016

in Mean Reversion , Research , Stocks by Cesar Alvarez

ConnorsRSI Analysis

A couple posts ago, I did the RSI Analysis. This post will focus on ConnorsRSI which I created while working for Larry Connors. When creating the indicator, the focus was on short-term mean-reversion results. We will look at that here but also how does it handle longer-term holds. Since I did not test this when I originally did the work, I was looking forward to seeing the results.

ConnorsRSI

ConnorsRSI is an indicator made up of three components. The first being a 3 period RSI on the closes. The second being a 2 period RSI applied to the current up/down streak. The last being a rank of how big today’s move is. Then a simple weighted aveage is used to combine them. For more details on the calculation and how to use it see this link.

May 4, 2016

in General by Cesar Alvarez

Making new equity highs. It happens less than you think.

A reader sent me a link to presentation, Robert Frey – 180 years of Market Drawdowns, about drawdowns and the time that a strategy is underwater. I highly suggest you watch it. I wanted to perform my own analysis on how often a buy and hold strategy on the S&P500 index is making new equity highs. Then, I wanted to compare the results to a new strategy I am working on for my trading. From previous experience, this number is a lot lower than people expect.

April 13, 2016

in Mean Reversion , Research , Trend Following by Cesar Alvarez

Relative Strength Index (RSI) Analysis

Recently I have been researching longer term hold strategies. I wondered which indicators by themselves would show an edge 3 to 6 months out. I am not looking to create a strategy from the indicator alone but want to know is there a statistical edge with it. Naturally, I started with my favorite Relative Strength Index, RSI.

March 16, 2016

in Mean Reversion , Stocks by Cesar Alvarez

Adding Stops and Scaling Out to a Mean Reversion Strategy

I came on an idea recently that I had tested. I have tested adding max loss stops to a mean reversion strategy, with no success. See this post for more on that. About eight years ago, I tested scaling out of trades. But this person claimed that adding the two together was how to improve a mean reversion strategy. Interesting idea I had not tested.

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March 2, 2016

in Data by Cesar Alvarez

Is your data in good shape? Would you know it if it was not?

At the end of last year, I was working with a client and we were having problems with code I had written. We would get different results depending on who ran the code. After comparing trade lists and doing some debugging, we discovered that their database was missing several symbols. These symbols existed in my database but did not exist in theirs. We were both using Norgate Data, which I highly recommend and can read my review here.

February 10, 2016

in ETFs , Mean Reversion , Stocks by Cesar Alvarez

Double 7’s Strategy

In the book, Short Term Trading Strategies that Work, which Larry Connors and I published in early 2008, we wrote about a simple strategy called “Double 7’s Strategy.” Through the years people often ask about this strategy. Does something that simple really work? How does it do in a portfolio? Does the concept work on stocks? Today, we will be answering these questions.

January 20, 2016

in Research by Cesar Alvarez

Revisiting Strategies

Two years ago, I wrote an article, The issues with back testing a short stock strategy, about my short strategy and the issues I had with short backtests and shorting. Soon after publishing that article, I stopped trading my short strategy. I like to retest strategies 2 to 3 years after I stop trading them. I will admit that I do not do this with all my strategies because I forget to do so. I am looking to see how the strategy has performed since then and if the reasons I stopped have changed. Maybe it is time to start trading it again. The current market conditions and the fact that I wrote about this strategy gave me the push to remember to do it. So how has my short strategy held up since I stopped?

January 6, 2016

in Research , Trend Following by Cesar Alvarez

Using Stops: The Good, The Bad and The Ugly

I recently gave a presentation on Better System Trader about using stops on a breakout strategy. The research produced results I was not expecting and may be surprising to you. The stops tested are

No stops
Maximum Loss using ATR (Intraday and End of Day)
Maximum Loss using percentage (Intraday)
Trailing ATR (Intraday and End of Day)
Profit target using ATR (Intraday and End of Day)

December 16, 2015

in Research by Cesar Alvarez

Equity Curve Correlation Analysis

A reader recently asked how to do equity curve correlation. For detailed information on correlation you can read Correlation and dependence or for simpler explanation read Correlation at Math is Fun. For steps on how to do this in Excel, which is where of course I did it, read Correlation at Excel Easy. I will cover here how one can use correlation analysis between equity curves.

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