Trend Following and Mean Reversion Strategy - Combined
Today, we show you a trend-following and mean-reversion strategy - combined.
Trend following and mean reversion are often presented as two opposing ways to trade.
Trend-following strategies assume that price movements can continue in the same direction. They attempt to capture sustained moves by buying strength and selling weakness.
Mean-reversion strategies make the opposite assumption: after a sharp move, prices are likely to pull back toward their average.
However, the two approaches do not necessarily have to compete. They can also complement each other.
Trend Following and Mean Reversion Strategy - Combined
The backtested strategy returned the following results (after slippage and commissions of 0.03% per trade):
Strategy type: Trend-Following and mean reversion.
Market: QQQ (Nasdaq-100).
Performance
No. of trades: 109
Average gain per trade: 4%
Win ratio: 67%
Profit factor: 4
Annual returns (CAGR): 14.8% (buy and hold 7.7%)
Exposure/time in the market: 75%
Risk-adjusted return: 19.6 (CAGR divided by time spent in the market (0.75))
Max drawdown: 28%
We also backtested the 2x leveraged version of QQQ, namely QLD:
The annual returns increase to 28%, but the max drawdown is also a gut-wrenching 51%.
Trading Rules
We backtested the following trading rules: