Mean-Reversion Long - For Bold Contrarians

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Mean-Reversion Long - For Bold Contrarians

edited Feb 28, 2019

Getting Started Mean Reversion Asset Allocation Pipeline Case Studies

Simple mean reversion long only algorithm. Got the rules from a book by Laurens Bensdorp.

Objective
- Trade stocks that are in a long-term uptrend, that have significantly volatility and are oversold on the short term.
- Execute trades every day.
- Beat the overall market in both bull and sideways markets.

Trading universe
- All stocks from AMEX, NASDAQ, and NYSE.
- Do not trade ETFs, pink sheets or bulletin board stocks.

Filters
- Minimum Average Volume of the last 50 days is above 500.000 shares (ensure liquidity).
- Minimum price is 1 USD.
- Dollar volume is at least 2.500.000 USD (ensure worth trading).

Position Sizing:
- Maximum 10 positions.
- Fixed fractional risk: 2 percent.
- Maximum position size: 10 percent.

Buys
1. Trade every day.
2. Close of the stock is above the 150-daily SMA (long term uptrend).
3. Seven day average directional index (ADX) is above 45 (short term trend strength.
4. Average true range percent of the last 10 days is above 4 percent (volatility).
5. The three day RSI is below 30 (oversold on a short term basis).
6. Rank orders by the lowest three day RSI.

Sells:
1. Trade every day.
2. Sell when one of the following conditions is met:
2.1 Stop Loss: 2.5 times the ten-day ATR.
2.2 Profit Target: 3 percent or more.
2.3 Time Exit: 4 days have passed and none of the above conditions is met.

Notes:
- The algorithm tracks the available cash trying to avoid spending more than we have.
- The rebalance is split in 2 functions with an hour gap. This is just to "ensure" sell orders are filled before we start buying.
- Sometimes 2.5 times the ATR is higher than the stock price, in those cases we don’t place the stop loss.
- The book tries to buy more fear by placing the buy orders at 4 percent less than the previous day closing price.
- The only purpose of canceling open orders at the end of the trading day is to avoid the console warnings.
- The backtests shown in the book are better. That could be because the entry and exit rules are a bit different. However it does beat the S&P 500.

Other algorithms:
- Weekly Rotation S&P 500
- Mean-Reversion Short - Money in bad markets

1 response

There was an error when selling at profit. I was using a limit order, this means it could get filled at less than the desired price. In the new version total return is slightly higher (+5%) but the drawdown is around 25% worse.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.