“Mean-Dev Duo” Systems

I am now offering a “signals service” for some of my systems that I personally trade. They¬†can be purchased as a subscription here. I am willing to sell the actual methodology of these systems as well, if you have backtesting software to handle the calculations. Contact me here for more information about a flat fee for the system details, or if you have questions.

Requirements for actually trading this system are at the end of this page.

At the beginning of 2016, I developed the core subsystem of a trading system I like to call “Mean-Dev Duo”. I have been trading the core subsystem (“Mean-Dev SPY”) since then, with good results.

At the beginning of 2017, I developed the other system, because I wanted additional systems that had a low correlation to each other while trading the same underlying ETF. The core subsystem is a mean-reversion system, while “Mean-Dev Momo Long” (aka “MDML”) is a momentum trade. Low correlation means less drawdown, which in turn allows me to leverage the results.

I used proper in-sample/out-of-sample testing to develop these systems. Generally, one ignores the in-sample period and focuses on the results of the “out-of-sample” data (which is not tested until the system is finalized). This reduces the likelihood of curve-fitting, which can be disastrous to trading models. The OOS period¬†performs very well.

Even better, the core subsystem has 31+ months of truly out-of-sample live trading experience behind it. The proof is in the actual money earned. The other subsystem (“MDML”) has been traded live since 1/1/17.

These two systems are short-term “swing trade” systems. They have a low overlap, and are only in the market about 40% of the time. This reduces exposure to catastrophic market events.

Here you can see the two systems working together to increase returns and decrease drawdown. Dark red is Mean-Dev SPY, orange is MDML and blue is thecombination.

Win rates are very high, in the range of 60-70%. Wins tend to be many and smaller, and losses tend to be fewer and larger. Even so, the maximum drawdown of these combined systems is such that you can comfortably use 3x leveraged ETFs. You maintain a better risk profile than buy-and-hold, with a greatly multiplied profit.

Because the drawdowns of this system are relatively small – even during bear markets – it is entirely practical to use leveraged ETFs. I use UPRO a 3x leveraged ETF that has been around since 2009. Here’s the performance of the two systems using UPRO.

Green is buy-and-hold, blue is the combined systems using 3x ETF “UPRO”. Dark red is Mean-Dev SPY and orange is MDML.
You can see here that the Mean-Dev Duo systems (blue) have a similar drawdown profile as buy and hold, yet they are leveraged 3x!

Here are the stats for trading either SPY or a 3x ETF such as UPRO (the later showing since 2010, since the ETF started in 2009).

Compare buy and hold to the combined Mean-Dev Duo column (no leverage, from 2000)
Compare buy-and-hold to the combined Mean-Dev Duo column (3x leverage, from 2010)

 

Disclaimer: Trading is of course very risky. Most traders lose money. You are responsible for any trades you make, including any losses you incur. I am providing signals for trades I am making myself, so I have actual money at risk. However, the future is unknowable, and you might lose money. Trade at your own risk, and don’t come crying to me if things go poorly.

Requirements:

  • You need to have sufficient capital that 1% profits per trade aren’t eaten away by commissions. If you’re trading a smaller account, consider a zero-commission brokerage.
  • Signals are only sent when they appear, in the evening after the closing bell. There are an average of 3.5 trades a month, although there will be a few more signals that aren’t acted upon.
  • One system has you buy at the next day’s open, and holds for a set period. The other two will have a signal sent the night before, but will be bought at the close of the next day ONLY if the day is up. Details will be sent with a welcome email.
  • The only stops are “time stops”. Mean-reversion systems tend to suffer by adding stop-loss requirements. Your protection against too much drawdown is simply to get out after the maximum holding period have passed.
  • One system has no exit criteria other than the hold period. The other one exits at the first profitable close (or a time limit, if no profitable close).
  • Each signal you receive will tell you the exit date. It is up to you to exit appropriately, as no exit signal is sent. For one system, you’ll need to monitor the price each day near the close, to determine if you’ll be exiting or not.