Cesar Alvarez: Pepperstone: The art of mean reversion trading - PursuitOfEdge/podcasts GitHub Wiki

  • started trading IBD CANSLIM style saying it was way easier to make money back then in the 90s
  • head of research for Larry Connors for 9 years
  • most people overcomplicate, the last step for his strategies is trying to remove as many rules as possible
  • RSI(2), %B
  • has a basket 10 strategies he can trade from but usually trades 5 at a time that he picks
  • mean reversion, breakout, trend following, momentum
  • some that hold days, weeks, months
  • tries to diversify the types of strategies and the length of their holds
  • the sooner people are trading multiple strategies that are different, the better
  • his MR run high 60s-low 70s, 6-7 day average hold
  • his breakouts run low 50s, hold 3-5 weeks
  • his momo/TF high 40s, low 50s, doesn't use a trailing stop, uses profit targets
  • he doesn't like being too dependent on the rare right tail event
  • just uses limit orders or next open price to get in
  • uses daily bars and C as the signal
  • uptrend: stock is above MA and the MA is moving upwards (higher than a month ago)
  • pullback: 3 down closes, RSI(2) < single digits, %B is pulled back, 5% below 5MA
  • believes mean reversion works better in an uptrend than a sideways bound range because the uptrends tend to be higher volatility
  • uses historical volatility, you could also use percent ATR, there are short-term trades and you want them bouncing quickly
  • he has definitely seen degradation of the RSI(2) over the years as people have picked it up
  • look for a bounce like RSI(2) > 50 again or get out after 10 days
  • stop losses in mean reversion where people typically put them at 5-10% will the strategy
  • and they tend to make things worse, however he still uses a 30% stop loss because that's when he just wants to get out psychologically
  • willing to take the risk on biotech/energy because when they bounce they bounce really well
  • for breakouts, he just uses a high breakout, but the key idea is that it's a NEW breakout e.g. it hasn't made a new high in the past month or so, and doesn't use volume at all, and doesn't want the breakout too huge
  • podcaster believes volatility is the only true asset class in the world, you're either long vola or short vola
  • momo: high vola, TF: low vola, MR: high vola
  • the time you want to turn them off is usually the wrong time to turn them off e.g. you suffered a drawdown and it's already too late