Market Conditions

Are there certain market conditions where a mean reverting strategy may be more effective than other strategies?

Absolutely, every strategy whether it be technical or even fundamental, will have periods of time where it works better than others. Every strategy goes in and out of sync with the market. Doesn’t matter what you do, that’s a fact of life. The unfortunate truth for a lot of people is they try and find a strategy that works well all the time in all market conditions and it just doesn’t exist. Once you can overcome that and understand that your strategy doesn’t have to be perfect all of the time, and you can make very good money regardless, then that’s a big step moving in the right direction.

I only trade mean reversion systems on the long side. So in the U.S. market I will actually stand aside when the market is trending down. I wait in cash for the market to turn around. In the Australian market, I do trade the mean reversion systems regardless of market direction –up or down. So the ideal situation for mean reversion system is the market moving sideways, or slowly moving up. A market that moves fast on the up side doesn’t allow me to actually get in, and I will underperform. A slow creep higher is probably the ideal situation, or a sideways market would be ideal. For example, in 2015 my U.S. mean reversion system produced a net return of about 14.5 to 15% and the S&P was pretty flat or down a little bit last year. It can work on a sideways market but I think a slow creep higher is the best.

Are there certain market conditions where a mean reverting strategy may be more effective than other strategies?

Absolutely, every strategy whether it be technical or even fundamental, will have periods of time where it works better than others. Every strategy goes in and out of sync with the market. Doesn’t matter what you do, that’s a fact of life. The unfortunate truth for a lot of people is they try and find a strategy that works well all the time in all market conditions and it just doesn’t exist. Once you can overcome that and understand that your strategy doesn’t have to be perfect all of the time, and you can make very good money regardless, then that’s a big step moving in the right direction.

I only trade mean reversion systems on the long side. So in the U.S. market I will actually stand aside when the market is trending down. I wait in cash for the market to turn around. In the Australian market, I do trade the mean reversion systems regardless of market direction –up or down. So the ideal situation for mean reversion system is the market moving sideways, or slowly moving up. A market that moves fast on the up side doesn’t allow me to actually get in, and I will under perform. A slow creep higher is probably the ideal situation, or a sideways market would be ideal. For example, in 2015 my U.S. mean reversion system produced a net return of about 14.5 to 15% and the S&P was pretty flat or down a little bit last year. It can work on a sideways market but I think a slow creep higher is the best.