tag:blogger.com,1999:blog-35364652.post543328946697563262..comments2024-03-15T10:28:18.248-04:00Comments on Quantitative Trading: The enduring profitability of mean-reversion strategiesErnie Chanhttp://www.blogger.com/profile/02747099358519893177noreply@blogger.comBlogger32125tag:blogger.com,1999:blog-35364652.post-34215828311327295922012-11-22T16:17:11.938-05:002012-11-22T16:17:11.938-05:00Thanks for the tip, M!
ErnieThanks for the tip, M!<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-83870343088822682822011-06-19T16:53:46.394-04:002011-06-19T16:53:46.394-04:00Anon,
If you construct a Bollinger band, then a si...Anon,<br />If you construct a Bollinger band, then a simple mean-reversion trade is just to buy at the lower band, and sell at the upper band. For details, see other examples in my book.<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-90614546666291112732011-06-19T11:47:37.046-04:002011-06-19T11:47:37.046-04:00This is all well and fine, but some of us only kno...This is all well and fine, but some of us only know the very basics of mean reversion. Can you describe a typcal mean reversion trade? I am interested in foreign exchange trading. Thank you.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-5788252403375046372010-11-11T12:15:59.380-05:002010-11-11T12:15:59.380-05:00Hi Anon,
10 bps per day indeed translates to 25% a...Hi Anon,<br />10 bps per day indeed translates to 25% a year. But it should be hoped that each round-trip trade of your strategy is higher than 10bps.<br />This transaction is an estimate, and should be revised for different instruments. It is about right for a mid-large cap US stock though.<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-41430197241455025702010-11-10T20:38:41.696-05:002010-11-10T20:38:41.696-05:00Hi Ernie,
I bought your book, it's great. I le...Hi Ernie,<br />I bought your book, it's great. I learned a lot from it. I'm a newbie in terms of short-term trading. I don't have real experience about short-term trading transaction cost. <br /><br />You mentioned in example 3.7 a 5bps per trade transaction cost (or 10bps per round trip). I guess this means annually 10bps * 250=25% if I do 1 round trip trade per day. An annual 25% cost is really high and hard to be profitable unless the strategy is superb. Is my understanding correct? I assume your 5bps includes everything i.e. fee and slippage ...?<br /><br />Thanks a lot!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-60697063399386483852010-10-11T08:31:37.753-04:002010-10-11T08:31:37.753-04:00Hi Anon,
I have not retested with 2009-10 data, bu...Hi Anon,<br />I have not retested with 2009-10 data, but from my personal trading, mean-reverting strategies continue to perform well these 2 years, though not as profitable as 2008.<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-35243583171500081782010-10-11T01:03:47.667-04:002010-10-11T01:03:47.667-04:00have you retested with 2009 and 2010 data? curiou...have you retested with 2009 and 2010 data? curious how things have changed? Also, is this with all stocks in that index or just ones that performed a certain level the previous day?<br /><br />ThanksAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-62816152716655794022010-02-23T11:18:45.169-05:002010-02-23T11:18:45.169-05:00Thank you Ernie!Thank you Ernie!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-70547217247901530412010-02-23T08:23:09.418-05:002010-02-23T08:23:09.418-05:00Hi Anon,
oldoutput.positions represent the positio...Hi Anon,<br />oldoutput.positions represent the positions generated with the full historical data set. After truncating the last cutoff bars from this oldoutput.positions, we should get identical positions as that generated with the truncated historical dataset. Otherwise, your backtest program has a look-forward bias.<br />ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-23439235632175758512010-02-23T00:18:57.581-05:002010-02-23T00:18:57.581-05:00Hi Ernie,
I am trying out example 3.6 on page 59,...Hi Ernie,<br /><br />I am trying out example 3.6 on page 59, step two for "look-forward-bias check". But I don't quite understand the Matlab code, could you explain in layman terms what is the comparison between the old and new positions? In particular, what is oldoutput.positions(...) supposed to generate?<br /><br />Many thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-19152544035934135182009-03-17T13:38:00.000-04:002009-03-17T13:38:00.000-04:00Hi Tim,There is no look-ahead bias in the backtest...Hi Tim,<BR/>There is no look-ahead bias in the backtest, but there may be a slippage issue if you execute slightly after the opening. Alternatively, you can use pre-open prices. The execution method for this strategy is what differentiates a theoretical discussion from a truly profitable trading strategy. Naturally, no traders will discuss their own proprietary execution method.<BR/>ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-49640038530949394982009-03-17T09:30:00.000-04:002009-03-17T09:30:00.000-04:00Hi Ernie,in your post above you state that "we ass...Hi Ernie,<BR/><BR/>in your post above you state that "we assume in this strategy you use the opening auction for execution", but doesn't that generate a look-ahead bias? You're using the opening price to signal your trades, but that opening price is not yet known when you submit your order to the opening auction. After the auction liquidity might be quite low, so the transaction costs could be much larger.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-29126666766392118362009-02-26T07:36:00.000-05:002009-02-26T07:36:00.000-05:00Hi Ivan,Please see the last paragraph of page 34 o...Hi Ivan,<BR/><BR/>Please see the last paragraph of page 34 of the book for login info.<BR/><BR/>Thanks,<BR/>ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-21959465032434670402009-02-25T22:30:00.000-05:002009-02-25T22:30:00.000-05:00hi Ernie,I have read your book and want to have a ...hi Ernie,<BR/>I have read your book and want to have a look at epchan.com/book/sp500_20071121.xls. But it seems need login ID and password. Is there anyways I can get the excel file? <BR/><BR/>Thx,<BR/>Ivan Tsai<BR/>email: ivan.tsai@yahoo.com.hkAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-65936638695807950432009-02-15T16:32:00.000-05:002009-02-15T16:32:00.000-05:00Hi Dan,It is true that switching indep vs dep vari...Hi Dan,<BR/>It is true that switching indep vs dep variables may generate slightly different cointegration results. However, you can choose pairs which cointegrate irrespective of the choice of indep variable.<BR/><BR/>The choice of optimal timeframe for correlation study is a general optimization problem. Generally, the timeframe that optimizes past performance is chosen, or one can average the results of different timeframes.<BR/><BR/>2 stocks that are currently far apart can still cointegrate very well, as long as the timeframe over which cointegation is studied is sufficiently long.<BR/><BR/>Best,<BR/>ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-44664521156720772662009-02-15T14:49:00.000-05:002009-02-15T14:49:00.000-05:00Hi Ernie,Just read your book and enjoyed it very m...Hi Ernie,<BR/><BR/>Just read your book and enjoyed it very much. While I'm a fan of mean reversion strategies, I'm still wrestling with some cointegration concepts and cointegration v. correlation. For example, with cointegration how do you choose which is the independent/dependent variable, as you get different results? Also, as with correlation, how do you choose to "optimal" timeframe as again you can get very different results with say 1y, 2y 5y etc. Lastly, for now, it would seem to me if 2 stocks have generally moved together but for some reason are currently x sd away from the mean, they can't currently have a high correlation, in fact may be negatively correlated, is the same true for cointegration.<BR/><BR/>Thx......DDWhttps://www.blogger.com/profile/09541680826420725449noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-56444094099766803482009-01-14T08:05:00.000-05:002009-01-14T08:05:00.000-05:00Hi Jacques,Thank you!I personally have not blended...Hi Jacques,<BR/>Thank you!<BR/>I personally have not blended mean-reverting and trending strategies into one, though I have run them side-by-side. However, you can see that Josh Brolin (http://epchan.blogspot.com/2008/12/josh-brolin-on-day-trading.html) has. <BR/>ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-65790232138656098442009-01-13T22:14:00.000-05:002009-01-13T22:14:00.000-05:00Ernie, just bought your book. Great job! Do you ...Ernie, just bought your book. Great job! Do you ever blend mean-reversion and trend-following into a single strategy?Jacques Marsunhttps://www.blogger.com/profile/17028741688120675707noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-56873943128263550372008-12-29T08:03:00.000-05:002008-12-29T08:03:00.000-05:00Hi Woodshedder,Thank you for your interest in my b...Hi Woodshedder,<BR/>Thank you for your interest in my book ... good luck trading!<BR/>ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-26078371351660351112008-12-29T08:01:00.000-05:002008-12-29T08:01:00.000-05:00Hi NN,You are right that most Trend Following stra...Hi NN,<BR/>You are right that most Trend Following strategies do not have as high a Sharpe ratio as mean reverting strategies. However, what counts is the overall Sharpe ratio of your portfolio when you combine both. I will bet that if you incorporate a TF strategy with appropriate capital allocation, you will find your overall Sharpe increases.<BR/>ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-36668046085101879262008-12-29T04:42:00.000-05:002008-12-29T04:42:00.000-05:00Ernie, I discovered your blog many months ago, and...Ernie, I discovered your blog many months ago, and likely left you a few comments. Then it seems as if I may have forgotten about your blog or didn't bookmark it...<BR/><BR/>Last weekend, searching through Amazon, I found your book, but didn't know it was YOUR book, until I once again stumbled upon your blog this evening. Serendipitous, I think.<BR/><BR/>I'll be buying a copy.Jeffhttps://www.blogger.com/profile/03267918585202497489noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-70083721542427687032008-12-26T01:34:00.000-05:002008-12-26T01:34:00.000-05:00Ernie,Purchased your book and I am quite pleased. ...Ernie,<BR/><BR/>Purchased your book and I am quite pleased. Do you have any insight regarding negatively correlated strategies to MR? I am thinking trend-following strategies would be ideal however I have not encountered any TF strategy with a Sharpe equal to a MR strategy. Even more so at an intraday frequency. Again any insights would be much appreciated!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-86407831970659952442008-12-24T09:42:00.000-05:002008-12-24T09:42:00.000-05:00Valentine: You are right to point out survivorship...Valentine: You are right to point out survivorship bias in this study. I mentioned this bias in chapter 3 of the book. To buy a survivorship-free dataset for me and most independent traders is too expensive an option. However, I should point out that each symbol accounts for about 1/300 of the gross capital of the portfolio. So even if you lose 100% of the capital in that position in one day, the damage to the overall performance will not be significant.<BR/>ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.comtag:blogger.com,1999:blog-35364652.post-23447951085123183602008-12-24T00:43:00.000-05:002008-12-24T00:43:00.000-05:00But what about survivorship bias? Buying and then ...But what about survivorship bias? Buying and then increasing positions in AIG, LEH, FRE, FNM, etc according to the strategy would have killed you in the process. Now, conveniently, these and other such names are not in S&P 1500 any more and one can claim that the strategy "worked".Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-35364652.post-54861736446981995292008-12-14T08:54:00.000-05:002008-12-14T08:54:00.000-05:00Hi eb,I must respectfully disagree with your state...Hi eb,<BR/>I must respectfully disagree with your statement that there is nothing specially enduring about mean-reverting strategies! The fact is: there has been no down years whether in bull or bear markets for this or many other mean-reverting strategies that I have tested so far. I must also disagree with your statement about December being a bad month for mean-reversion. My actual trading results as well as discussions with other traders indicate that December is yet another good month.<BR/>ErnieErnie Chanhttps://www.blogger.com/profile/02747099358519893177noreply@blogger.com