Category Archives for "Mean Reversion"
A frequently asked question is how I pick which variation from an optimization run to trade. This post will cover a ConnorsRSI strategy on S&P500 stocks. We will use a wide range of parameters to give us lots of choices to be used in the next post. In that next post, I will show how I take the results and narrow them down to one potential variation to trade. And then the final post, I will cover parameter sensitivity to help determine if the results are likely overfitted or not.
3/27/2017 CORRECTION: When I originally posted this, the results shown in the tables were not for the rules shown below. The table results are now matching the rules as below. The spreadsheet also has the corrected results.
My last post on using PercentRank to measure mean reversion proved very popular. A reader looked at the trades and wondered if it would be best to exit after five days because the average trade with longer holds was a loser. I am surprised I have not covered this topic before.
In most of my mean reversion posts, I use RSI(2) to determine if a stock has sold off. In this post, I will explore how to use a stock’s recent return to determine if it has sold off. This will be done in way to normalize the return between low and high volatile stocks. This basic strategy has only two setup rules.
In my last post I showed research on how optimization results can be mean reverting. Sometimes, my research keeps getting side tracked as I think of random ideas to look at. In this post, we look at the random walk my research took starting from my mean reverting optimization research. I will show how changing the start date can have a big change in the results, correlation of 1990’s to now, and random data and how it correlates.
Often one runs a optimization of a testing idea, then using some set metrics from these results, one picks a variation to trade. What often comes as a surprise to people, and myself the first time I saw this, is that your optimization runs are often mean reverting. What do I mean by this?
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.
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 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.
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.
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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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.