S&P 500 Mean Reversion Using IBS and RSI (Classical Mean Reversion Strategy S&P 500)

Last Updated on June 19, 2022 by Quantified Trading

Below is a simple and easy trading strategy to implement in SPY or the S&P 500:

The classical mean reversion strategy in the S&P 500

In plain English the strategy reads like this:

  1. IBS (internal bar strength) must be lower than 0.25 (using daily bars).
  2. RSI (21) must be below 45.
  3. If 1 and 2 are fulfilled, go long at the close.
  4. Exit when close is higher than yesterday’s close.

The equity curve since January 2000 looks like this (starting with 100 000 in equity and allocating 100% of equity to every trade, ie. compounding, but taxes are not deducted):

 

The stats are like this:

How does the strategy perform if we invert it, ie. reversing the parameters? This is how the equity line performs:

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  • I have a dumb question, these strategies all lose to buy and hold method of spy, which has 13% gain a year and comparable drawdown to this method. What is the edge of this strategy vs a buy and hold strategy? (Not to mention there are no dividend and more transaction cost,)

    • Hi, It’s not a dumb question, but I think you’re somewhat wrong:
      – Before commission, slippage and taxes the strategy generated 7.28% compared to SPY’s buy and hold of 5.34%.
      – Max drawdown for the strategy was 20.88% vs SPY’s 55.19% (diring 2008/09).

      Besides, a strategy with low drawdown can be scaled, ie. using some sort of leverage. The strategy above is without leverage. If you are for example trading future-contracts on S&P 500, the return can be magnified. Of course, that increases the risk, which you have to manage.

      Regards,
      Oddmund Groette