When XLP Diverges From Recent High And Low: A Mean Reversion Trading Strategy

Last Updated on June 19, 2022

A while back I wrote about a day trading strategy in SPY. This one works pretty well on XLP as well, with some modifications:

The high and low divergence mean reversion trading strategy

The strategy is like this in plain English:

  1. Calculate a 25 day average of the (High minus Low – (H-L)). That is the “ATR”.
  2. Calculate the Low of the last 10 days.
  3. Calculate the (C-L)/(H-L) ratio every day (IBS).
  4. Calculate a band 2.5 times above the 10 day low using the average from point number 1 (ATR).
  5. If XLP closes above the band in number 4, and point 3 has a higher value than 0.8, then go short at the close.
  6. Exit on tomorrow’s close.

Vice versa for long except the value in number 3 must be below 0.33.

Test period from 2005 until 2013. Here are the results:

Long:

 Total %  #Fills #Wins Average
53.57363 161 106 0.333

Profit curve:

Short:

 Total P/L #Fills #Wins Average
49.03834 237 141 0.207

Equity curve:

By the way, this strategy has been horrible in 2013 on the short side (live trading).

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  • Question: In your formula point #4:
    Calculate a band 2.5 times above the 10 day low using the average from point number 1 (ATR).

    Is the actual calculation of the Upper Band as follows:
    (pseudo code)
    UpperBand = 2.5 * LowestLow (past 10 days) + Moving Average(H+L, 25)

    I am having some difficulty in reproducing your results on XLP, and it would be greatly appreciated if you could just clarify that one point.

    Thanks in advance.

    Reply