Alan Clement: Pepperstone: Combining trend following and mean reversion into one proven strategy - PursuitOfEdge/podcasts GitHub Wiki

  • 4 edges available to retail
    1. momentum/trend following
    2. mean reversion
    3. volatility
    4. seasonality
  • institutional edges due to resources/gear: arb, stat arb, pairs, latency
  • when it comes to stats he likes risk-adjusted return ones: sharpe, MAR, etc.
  • he trades multiple systems but on the same account

momentum - continuation of direction

  • higher expectancy, higher holding period, higher market risk, lower win rate, lower opportunity
  • add smoothing to the ROC e.g. MA(ROC), experiment with ADX
  • price, volatility, liquidity filters, overall market filter
  • scans the NASDAQ, 10/100 positions
  • limits to at most 3 per sector so e.g. it doesn't load up all on gold
  • lookback 6-8 months, advises not getting into the trend too early at the breakout, let the trend form a bit because this leads to higher win rates

mean reversion - reversal of direction

  • lower expectancy, lower holding period, lower market risk, higher win rate, higher opportunity

  • where is the price in the current range, is it at some extreme?

  • C < BBBOT, RSI < 5

  • filter for a high volatility move, this is a short vola trade, so you bet that vola will shrink and price will rise

  • some measure of short-term vola > long-term vola or current vola > average vola

  • limit orders

  • marrying mean reversion and momentum

    • when the VIX is high, you want to bet vola goes down, so this initially is a good mean reversion trade. then as it as continues to fall, this is a good trend trade at the back of it
    • if you take the VIX and divide it by 15.9, this is the expected move in the SP500 in the next 30 days
    • VIX term futures flip from backwardation to contango is a very strong signal to buy
    • use CBOE futures continuous data