What tools and services does one use to do this kind of testing? Where does the data come from?
The data used is Sharadar Core US Equities Bundle: https://data.nasdaq.com/databases/SFA It's a great survivorship-bias-free dataset. Regarding tools, I use Python. I wrote the backtesting software many, many, many years ago during my Master's degree, and I've been refining it ever since. It's an event-driven engine (they are slower than vector-based engines, but they are easier to write strategies for, understand, a…
Changing a mean reversion strategy to deliver 30% annual returns since 1999
21–30 of 34 posts
Re: Changing a mean reversion strategy to deliver 30% annual returns since 1999
#22I think the risk of a 35% drawdown is too big with this strategy. Even if 20%, it's still too big. Perhaps 15% would be about at the borderline of okay.
Just bear in mind the S&P 500 had a drawdown of 60%, over 13 years, from 2000 to 2013 :)
During the period from 2000 to 2013, the S&P 500 did experience significant drops, particularly during the dot-com bubble burst in the early 2000s and the financial crisis of 2007-2008. The largest drawdowns in this period were:
1. *Dot-com Bubble (2000-2002)*: The S&P 500 fell significantly after the peak in March 2000, dropping about 49% until it bottomed out in October 2002.
2. *Global Financial Crisis (2007-2009)*: The index again suffered a major drop, losing approximately 57% of its value from its peak in October 2007 to its low in March 2009.
However, these drawdowns did not last continuously for 13 years, nor did they result in a cumulative drawdown of 60% sustained over that entire period. The S&P 500 recovered from these lows and even reached new highs within the timeframe specified.
Re: Changing a mean reversion strategy to deliver 30% annual returns since 1999
#23Earlier quoted context omitted.
Just bear in mind the S&P 500 had a drawdown of 60%, over 13 years, from 2000 to 2013 :)
While I entirely agree in spirit and in context, and I get the point too, the historical specifics as clarified by GPT were: During the period from 2000 to 2013, the S&P 500 did experience significant drops, particularly during the dot-com bubble burst in the early 2000s and the financial crisis of 2007-2008. The largest drawdowns in this period were: 1. *Dot-com Bubble (2000-2002)*: The S&P 500 fell significantly af…
Re: Changing a mean reversion strategy to deliver 30% annual returns since 1999
#24Earlier quoted context omitted.
> I never claimed that my strategy beats the sp500. It has underperformed, especially the way the market has been. The market has returned 25% over the last year. After two years of research, you have developed a trading strategy that, compared to the S&P 500, "has underperformed, especially the way the market has been"? > The expected performance of the strategy is somewhere between 10% and 30%, but it is not clear…
I am just stunned by your worldview which I find is wrong in so many ways. It's no wonder that you couldn't muster the intelligence to come up with any profitable strategy at all. It is where the rubber meets the road. Moreover, you go about confidently asserting and spreading your disinformation, attempting to brainwash others with your false beliefs and lies. > has underperformed Like I said, 25 is between 10 and 3…
100% my reaction towards your comments as well.
> It's no wonder that you couldn't muster the intelligence to come up with any profitable strategy at all.
Studies have shown that over the long term, the majority of actively managed funds fail to consistently outperform their benchmark indexes after accounting for fees. With facts like these my intelligence says stick to index investing.
> Moreover, you go about confidently asserting and spreading your disinformation, attempting to brainwash others with your false beliefs and lies.
I am sharing commonly accepted knowledge. It is commonly accepted that buy low sell high trading strategies are like perpetual motion machines. This does not stop some poorly educated honest inventors from inventing them however. Con artists also “invent” them and offer them for sale or offer their expertise to help build one for yourself. Which of these you are I am not sure yet. Early on it can be hard to tell since a good con artist is subtle.
> Like I said, 25 is between 10 and 30. It depends what exactly the strategy's performance is, and we don't know what it is for various reasons. I look at it day to day.
You realize investments are not judged by returns but metrics like returns per risk such as sharpen ratio, sortino ratio, etc? If risk did not matter leverage can trivially multiply returns. TQQQ for example can look attractive till you realize a daily ~30% index drop wipes you out as happened with oil versions of such funds during COVID pandemic.
> You with your limited worldview are presupposing that all strategies work because others haven't found them.
Once a strategy is known, it gets rapidly arbitraged away as traders compete to exploit the inefficiency. Widespread adoption of a strategy changes market dynamics in ways that invalidate the original premise. Strategies that become crowded trades are vulnerable to severe losses if sentiment turns and everyone rushes to exit at once.
> That's not how they all work. Some work despite the fact or even because of the fact.
Yes! Pump and dump schemes and similar fraudulent trading strategies exploit popularity to manipulate markets. These scams often involve self-proclaimed "gurus" who heavily promote a stock or cryptocurrency, artificially inflating its price. They lure unsuspecting and inexperienced investors with promises of easy profits, diverting them from proven investment strategies like index investing.
The more popular and influential the guru, the greater their ability to temporarily move markets with their recommendations. In essence, the guru's predictions can become a self-fulfilling prophecy in the short term, as a herd of enthusiastic followers rush to buy the promoted asset. However, this popularity is manufactured and fleeting.
What the followers don't realize is that the guru has already quietly accumulated a position beforehand at a much lower price. As the guru's devotees drive up the price by buying en masse, the guru sells their holdings at the artificially inflated prices, pocketing significant profits. The asset's price then collapses, leaving the guru's followers with substantial losses.
In this way, pump and dump schemes enable unscrupulous individuals to exploit the trust and capital of unsophisticated investors. Regulators are increasingly cracking down on these scams, but they remain a persistent problem, particularly in lightly regulated markets like cryptocurrencies. Investors should be highly skeptical of "get rich quick" trading tips, especially those popularized by social media influencers or self-declared experts promising unrealistic returns.
> Wrong again. Professional traders specifically discard such retail noise, although I suppose it could be used in certain contexts.
So why do some professional traders pay to trade with retail order flow? They pay for it so They can “specifically discard such retail noise”?
Obviously not. Professional traders try to exploit retail order flow by "front-running" - getting in front of large retail orders that are likely to move the price. If they can buy right before a large influx of retail buy orders hits the market, they can then sell into that buying pressure for a quick profit. Order flow can also give a view into where retail traders are placing stop-loss and limit orders. Professional traders can use this to their advantage, triggering stops or fading popular limit order levels.
> The number has no basis in any zero sum game; it is whatever the buyer last paid.
Stock trading can be considered a zero-sum as one trader's gain is another trader's loss. When someone buys a stock and the price goes up, they profit, but the person who sold it to them missed out on those gains. Conversely, if the stock price goes down, the buyer loses money while the seller avoided those losses. On any gi rn day of trading the total wealth of all participants remains the same, with money just changing hands between them.
In the long run however stock trading is actually a negative-sum for traders.
Traders pay fees to brokers, exchanges, and other intermediaries for executing their trades. These costs eat into the overall profits, making the total wealth of all participants decrease over time.
There is typically a small difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). This spread represents a loss for the overall market, as it's a cost that doesn't contribute to any participant's profits.
Time and resources devoted to trading could have been used for other productive activities, such as starting a business or investing in education, which could have generated wealth for the overall economy.
> If your lies were the truth, bitcoin wouldn't exist, and gold wouldn't carry value either.
Tell me why are prices rarely advertised using gold or Bitcoin? Might it be because these are speculative assets rather than currencies. If they were widely accepted as currencies, you would see prices consistently posted using units of gold or Bitcoin. However, this is not the case due to their highly volatile value, which is a result of the lack of active supply management.
The primary purpose of a currency is to maintain stable prices while discouraging the hoarding of the currency itself. This is achieved by controlling the money supply to maintain a small, consistent rate of inflation.
When excessive debt accumulates in the economy, inflation may be strategically increased to help clear that debt.
This is a fundamental aspect of how modern monetary systems function, and it is well-understood by those with an education in economics. There are no surprises here.
It is generally unwise to store wealth using a fiat currency for extended periods, as it is not designed for that purpose. Instead, the main objective of a fiat currency is to facilitate transactions and promote overall economic health. Other investment vehicles, such as real estate, stocks, or bonds, are more suitable for long-term wealth preservation and growth.
> Gold was used as a currency for thousands of years, also by the Romans and by the US with a gold-backed dollar.
Societies used to not care much about washing and keeping clean for thousands of years. For this reason we should go back to that? The fallacy in this argument is an appeal to tradition or appeal to antiquity. Just because something was done a certain way for a long time, does not necessarily mean it is the best or most appropriate way to do things now.
> Anyway, as a user of money, I couldn't care less about the destructive agenda of economic growth.
Economic growth today is essential for creating a better future for coming generations. By expanding productive capacities, raising living standards, and spurring innovation, we lay the foundation for a world of greater prosperity and human flourishing.
Growth enables critical investments in education, research, and governance that pay long-term dividends. We have a moral obligation to be good ancestors by supporting economic dynamism. While some argue growth is unsustainable, it is actually the key to developing the technologies needed for both abundance and sustainability.
>> Countries are "owned" by their voters.
> Countries are owned by those with the money.
Indeed spending choices are votes that shape the economy. Every purchase sends a signal to producers about what to make more or less of. Money is not just for transactions, but a voting system that guides the market based on consumer preferences.
Collectively, our financial decisions determine which businesses succeed or fail. Each dollar is a vote for the type of world we want. So daily purchases, while they may seem small, wield power in creating the economic reality we all experience.
> We are done here. I do not desire to continue a conversation with someone who unquestioningly peddles whatever untruths they've been taught without regard for the actual truth.
I expect there may be others that think as you do and I hope our conversation helps them. Thank you for being my foil!
Re: Changing a mean reversion strategy to deliver 30% annual returns since 1999
#25Earlier quoted context omitted.
> I never claimed that my strategy beats the sp500. It has underperformed, especially the way the market has been. The market has returned 25% over the last year. After two years of research, you have developed a trading strategy that, compared to the S&P 500, "has underperformed, especially the way the market has been"? If your strategy depends on buying / selling it will trigger taxes each time this happens, yes? S…
Not sure what you're replying to, that wasn't the question I asked.
Re: Changing a mean reversion strategy to deliver 30% annual returns since 1999
#26Essential reading for all prospective traders is Taleb's "Fooled by Randomness." Markets are full of feedback loops, so you can't expect the same results with "paper" backtesting or "paper" forward testing as with real trades, especially in larger amounts. With such paper testing you can discover and fool yourself with amazing high-probability, high-earning strategies that come with the hidden surprise of low probabi…
I haven't read Taleb's book. But wouldn't the logic you employ apply to any strategy? eg I could also say that you could fool yourself believing that investing in the S&P 500 index is a strategy with high-probability of performing well, with a hidden surprise of low-prob cat losses.
You ask a good question.
Consider a game like rock-paper-scissors. The goal is to predict your opponent's move. Among all possible strategies, the random strategy is unique because it can't be predicted. Any other strategy can be anticipated by a smarter opponent. Being random means you can't lose to a smarter opponent.
In trading, buying low and selling high requires prediction. Any strategy that relies on prediction becomes predictable to smarter opponents. Buy-and-hold index investing is the only strategy immune to this exploitation because you're effectively betting on everything. With passive index investing, your investments grow at the rate of business growth, making this strategy special.
Re: Changing a mean reversion strategy to deliver 30% annual returns since 1999
#27Earlier quoted context omitted.
I haven't read Taleb's book. But wouldn't the logic you employ apply to any strategy? eg I could also say that you could fool yourself believing that investing in the S&P 500 index is a strategy with high-probability of performing well, with a hidden surprise of low-prob cat losses.
> But wouldn't the logic you employ apply to any strategy? You ask a good question. Consider a game like rock-paper-scissors. The goal is to predict your opponent's move. Among all possible strategies, the random strategy is unique because it can't be predicted. Any other strategy can be anticipated by a smarter opponent. Being random means you can't lose to a smarter opponent. In trading, buying low and selling high…
And the probabilities of you succeeding won't be good, of course. But neither are the chances of a startup succeeding good either.
Re: Changing a mean reversion strategy to deliver 30% annual returns since 1999
#28Earlier quoted context omitted.
> But wouldn't the logic you employ apply to any strategy? You ask a good question. Consider a game like rock-paper-scissors. The goal is to predict your opponent's move. Among all possible strategies, the random strategy is unique because it can't be predicted. Any other strategy can be anticipated by a smarter opponent. Being random means you can't lose to a smarter opponent. In trading, buying low and selling high…
I agree that competitors could outsmart you. But that's just like in any other kind of business. Doesn't mean entrepreneurs should give up trying to start a business. And the probabilities of you succeeding won't be good, of course. But neither are the chances of a startup succeeding good either.
This dynamic is similar to gambling games like Texas Hold'em poker in a casino setting. While skilled players may consistently profit at the expense of less experienced participants, the overall wealth within the game remains constant. No new value is generated; instead, existing wealth is redistributed among the players based on their relative performance and luck. When research time and fees are added trading is largely “negative sum”.
NOTE: Some trading activities, such as market making and arbitrage, provide liquidity and help maintain fair pricing in financial markets but these operations require expensive low latency market access and are dominated by market insiders and are not possible for retail traders.
Re: Changing a mean reversion strategy to deliver 30% annual returns since 1999
#29Earlier quoted context omitted.
I agree that competitors could outsmart you. But that's just like in any other kind of business. Doesn't mean entrepreneurs should give up trying to start a business. And the probabilities of you succeeding won't be good, of course. But neither are the chances of a startup succeeding good either.
Trading, particularly short-term "buy low, sell high" strategies, differs fundamentally from businesses that create products or deliver services. In trading, profits are often directly linked to the losses of other market participants, making it a zero-sum activity. In other words, for every winner, there must be a corresponding loser on the other side of the trade. This dynamic is similar to gambling games like Texa…
Re: Changing a mean reversion strategy to deliver 30% annual returns since 1999
#30Earlier quoted context omitted.
Trading, particularly short-term "buy low, sell high" strategies, differs fundamentally from businesses that create products or deliver services. In trading, profits are often directly linked to the losses of other market participants, making it a zero-sum activity. In other words, for every winner, there must be a corresponding loser on the other side of the trade. This dynamic is similar to gambling games like Texa…
While I do believe it provides liquidity in all cases, let's just focus on the zero-sum aspect. My response is - so what if it's a zero sum game? Why should someone care if that's the case? It's not as if all startups out there add value to the world.
There is a fundamental difference between startups and "buy low, sell high" trading. Even if only a minority of startups succeed, they can create significant value for society by introducing innovative products, services, or technologies. In contrast, even if the majority of traders were "successful," there would be no net value created, as one trader's gain is another's loss, and the overall wealth in the system remains unchanged.
> so what if it’s a zero sum game?
While you may not initially be concerned about the distinction between positive-sum and zero-sum activities in society, studying history and economics may change your perspective. Positive-sum activities, such as entrepreneurship and innovation, contribute to economic growth and improved living standards, whereas zero-sum activities, like “buy low sell high” trading, do not.
> why should someone care?
Consider this analogy: if "buy low, sell high" trading is like playing chess, and your opponents are a collection of the best chess engines money can buy, operated by the world's top experts (think Magnus Carlsen), how profitable can you realistically expect your trading to be? The odds are heavily stacked against the retail trader. Some professional traders pay brokers to have retail orders routed to them for this reason much like how professional poker players want to play amateurs for their income.
While a small fraction of professional traders manage to beat the returns of buy-and-hold index investing, the fleeting existence of market-beating strategies is not a valid reason for the average investor to attempt them. Just as you cannot predict which lottery tickets will be winners, you cannot foresee which trading strategies will outperform. If this was possible highly paid professional traders that devote their life to it would be able to do it but only a few actually do and luck plays a big role in their success.
Markets have “seasons” and what seems to work in one season can be devastating in another. Markets also change in response to the trading strategies being used (aka “reflexivity”) and “paper testing” can give false confidence.