S&P 500 Mean Reversion Using IBS and RSI (Classical Mean Reversion Strategy S&P 500)
Last Updated on June 19, 2022
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:
- IBS (internal bar strength) must be lower than 0.25 (using daily bars).
- RSI (21) must be below 45.
- If 1 and 2 are fulfilled, go long at the close.
- 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.