Quick Short 💡

A backtested 𝗜𝗻𝘁𝗿𝗮𝗱𝗮𝘆 𝗠𝗲𝗮𝗻 𝗥𝗲𝘃𝗲𝗿𝘀𝗶𝗼𝗻 trading strategy 📈 📊

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What is Reversion to Mean? 🧐

Mean reversion is a concept in finance that suggests, after an extreme price move, stock prices tend to return back to normal or average levels.

Prices do move away from the mean sometimes but revert to the mean price over time.

Extreme price moves away from the mean and is hard to sustain for extended periods.

𝗘𝘅𝗮𝗺𝗽𝗹𝗲:Extreme Gap-ups and Gap-downs

Stock tends to come back to intraday mean prices

or

Longer term moving average (100 and 200 ema) depending on the time frame you are looking at

🔸 Hypothesis:

1️⃣ Whenever stocks have a large opening gap, they tend to come back to the mean levels.
2️⃣ Backtesting is done on Nifty500 Universe and probabilities are calculated on stocks which have highest chance to fall based on historical data.

𝘌𝘹𝘢𝘮𝘱𝘭𝘦:

🔸 So out of say 10 stocks that have opened Gap-up , each stock is ranked based on a proprietary algorithm and the stock with the highest odds to revert to the mean is selected.

𝗛𝗶𝗴𝗵 𝗙𝗶𝘃𝗲💡

A backtested 𝗯𝗮𝘀𝗸𝗲𝘁 𝗮𝗽𝗽𝗿𝗼𝗮𝗰𝗵 trading strategy 📈 📊

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⭐ 𝗪𝗵𝗮𝘁 𝗶𝘀 𝘁𝗵𝗶𝘀 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝘆?

🔸 We buy a basket of 5 stocks every Monday and sell them all on Friday.

🔸 Yes, it's that simple.

⭐ 𝗪𝗵𝘆 𝗱𝗼𝗲𝘀 𝗶𝘁 𝘄𝗼𝗿𝗸?

🔸 Stocks in general keep going up & down, no rocket science there.

🔸 But, interestingly some stocks when they go down considerably, they bounce back to some extent.

🔸 This model tries to profit from such up moves through a basket of stocks

⭐ 𝗘𝘅𝗮𝗺𝗽𝗹𝗲𝘀 𝗼𝗳 𝗹𝗮𝘀𝘁 𝘄𝗲𝗲𝗸’𝘀 𝘁𝗿𝗮𝗱𝗲𝘀

⭐ 𝗛𝘆𝗽𝗼𝘁𝗵𝗲𝘀𝗶𝘀:

🔸 Universe - NSE500

1️⃣ Create a basket of stocks that have the lowest returns in the past.

2️⃣ Filter the stocks based on turnover to check for liquidity.

3️⃣ Select stocks with the best odds to go up.