The 2x Fall Trading Strategy In The S&P 500 (Mean Reversion Trading Strategy)

Last Updated on October 16, 2021 by Oddmund Groette

Mean reversion has worked pretty well for the main stock indices for some decades. Today we look at a mean reversion trading strategy that goes long at the close when the S&P 500 falls more than twice the average change.

The 2x Fall trading strategy in the S&P 500

Here is the strategy in plain English:

  1. Calculate the absolute value of the % change from today’s close from yesterday’s close (c2c).
  2. Calculate a 25 day average of number 1.
  3. When SPY falls more than two times the number in number 2 from Close to Close (c2c), then go long at the close.
  4. Exit on next day close.

A very simple strategy. The idea is simply to buy when the risk premium rises. The test period is from 2005 until the present (if today is Monday, the result is showing the gain from Monday’s close until Tuesday’s close):

P/L #fills #wins Avg
44.73 159 94 0.28

Let’s see this strategy broken down into weekdays:

Mondays:

P/L #fills #wins Avg
14.99 19 13 0.79

Tuesdays:

P/L #fills #wins Avg
13.46 36 23 0.37

Wednesdays:

P/L #fills #wins Avg
13.11 35 19 0.37

Thursdays:

P/L #fills #wins Avg
-7.88 37 15 -0.21

Fridays:

P/L #fills #wins Avg
11.05 32 24 0.35

As you can see it works pretty well except Thursdays. I can’t think of any specific reasons why except that SPY tend to revert mid-week.

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