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¶ Episode Introduction and Series Overview
Hello and welcome to Better System Trader. This is episode number 130, and this is the second episode in what will now be a three-part series on building mean reversion strategies with Cesar Alvarez from Alvarez Quant Trading. And the reason why this is now a three part series instead of uh the two we had originally planned is because we received such a huge amount of questions. I think uh it was probably maybe six or maybe it was eight pages worth of questions.
So we've recorded that now and it's now going to be its own episode. So look out for that as the third episode in the series coming out really soon. We had a lot of great questions in there too, so thanks to everyone who submitted questions. I think you're going to find a lot of value in that.
So in the first episode we discussed the goal of mean reversion trading, how to select a trading universe, a number of effective techniques to measuring mean reversion, and also how to combine indicators to identify better quality trade. Now if you haven't listened to that episode yet, you should go back and check out that one first.
In the second episode in the mean reversion series, we're going to continue on a little bit more about entries first, including how to classify market conditions and adjust mean reversion strategies to the current market. Caesar's also going to share some tips to choosing trades with a higher probability of success when you have more trades than your account can take. He's also going to explain how the maximum number of positions you trade affects the role of luck on trading results.
and how to produce more reliable results instead and also why it can be a good idea to have different strategies that enter at market and on limit orders instead of just one or the other. Then we're also going to discuss exits, including the impact of stops on returns and why they don't often protect you from the really big losses. And we're also going to discuss implementing multiple exits, what works best in mean reversion and what to avoid and how to test exit combinations.
Plus we cover so much more than that, so it's another value packed episode with Caesar on mean revision, so let's get straight into it now. Hi Cesar, welcome back again. It's great to have you here for this uh second part in the mean reversion series.
Yeah, I'm glad to be here and I'm excited to finish the discussion on Minaversion.
Yeah, so if we just do a quick little um uh review of what we discussed in the first session, just so that uh give jog people's memory a little bit. So we we initially started talking about the uh the benefits and the challenges of mean reversion and the types of goals that you're aiming to achieve when you're looking to build mean reversion strategies.
And then we had a discussion about the trading universe and we talked about loads of different ways to measure uh mean reversion. You discussed a a lot of different techniques that we can use there. So Uh that was really interesting. And then we um we talked a little bit more about the entries and the filters. So I think today we're going to continue on a little bit more with the entries before we move into the other aspects of mean reversion trading.
Yes, that's correct.
¶ Market Regime Classification and Adaptation
Yeah. Okay. So um d did you want to start with market regimes?
Yes. So one common thing um a lot I think is an error that a lot of people do is they try to make a strategy that works in all market types. What I mean by that is a strategy that works both in bearable markets or a strategy that works both in high volatile markets and no volatility markets.
I believe it's really difficult to do those type of strategies. So one thing I tend to do in most of my strategies is to have a market regime, meaning, you know, it This strategy is built for a bear market, maybe I bear uh or bull market, and I do something simply as the two hundred day moving average.
on the uh spot SPY or it could be a strategy that it uh trades just high volatility environment in something like, you know, only when the VIX is above twenty will I trade the strategy, or only when the VIX is below While I trade the strategy. Or you can also measure volatility based on the historical volatility of the spider.
So those are different ways of adding market regimes. I think it makes that a lot easier than as opposed to trying to make a you know a strategy that works well in both bear and bull markets. Uh another thing that you can use the market regime filter for is um to change your strategy. Maybe you do want to change both. So uh maybe during a bull market you have uh loose parameters and you're you know you're uh and you get in a lot easier. But then in a bear market
you make your parameters much tighter. So you look for a mean reversion um instead of let's say RSI being less than ten, now you're looking for the RSI less than one to be an entry. And something like that. So just changing your parameters depending whether you're in a bull market or bear market or a high volatility market, uh low volatility market. Or of course you can always just be in cash. I know a lot of people don't like being in cash.
Uh but you know cash is really good when you're not when everybody else is losing money and the markets are losing money. So th you know, those are how I tend to use market regimes on that front there.
So are they are they the the main ways you classify market regimes is basically trending or not trending and uh volatility? Is there any other kind of things that you look at?
Uh yeah, those are my two primary is volatility based. I wouldn't say trending, but more, you know, are we above the two hundred day moving average versus being below? Um For me, trending more means maybe, you know, maybe you do do you know, to do trending, I would do something like maybe a dual moving average, the fifty over the two hundred, kinda like that.
Uh but uh I guess I tend to keep it quite simple, just saying, you know, if you're above the two hundred or below the two hundred. And then of course you can combine them. If you really wanted to have four market conditions, you could do, you know, a volatile bull market versus a quiet bull market and you know. have a volatile bear market versus a quiet bear, which usually doesn't exist. So I mean, um, that's also another very popular thing to do. But I think just two regimes is good is enough.
Yeah. So when you're looking at the volatility regime, how far back are you looking? Because mean reversion trades typically can only last per perhaps a few days. So how far back do you look to kind of get a judge of the the market regime?
Yeah, I I typically look back, uh I'll use uh a hundred day historical volatility often uh as my volatility measure. I'll do that on the SPY or the SPX uh uh index. Uh or you could always do it also on the VIX, like I said. But then I would do something like a moving average on the VIX, just'cause the VIX can move so much. Uh if I was to use the VIX as a my volatility regime.
Yeah. And and are you looking for a like a fixed threshold or do you try and take into account uh the recent volatility as well and look at ratios and things like that?
Uh I tend just to look at a fixed number uh for the volatility. So, you know, both either the VIX or the um doing historical volatility on the spiders. I you know, typically the when I use values are typically within the eighteen to twenty-two range. It's both for the VIX and the historic volatility, both of those.
seem to be a good cutoff point when to decide to be in one, you know, a volatile market or not in a volatile market. But you can look, you know, you can say, uh, you know, uh it's, you know, the current volatility is in the top. half of the last, you know, three years or whatever, whatever time frame. That's another way of looking at it.
So when you're looking at the regime, are you assessing the instrument on its own or the index as well or a a a combination?
I'm just using the uh index itself. I don't do it on the uh the traded instrument. So I don't do it on the individual stocks. I do it uh I'm trying to this is more of a market regime, so I'll do it only on um the index itself, not on the individual stock.
Right, okay. So that doesn't really concern you if the the um the index is in is above the two hundred but the actual instrument is it?
Uh, right. Well yeah, it could be part of my original filters that we discussed in the on the first episode. Uh but uh if it's not, yeah, I'm not that concerned.
Yeah, I think actually one of the um filters you mentioned in our last chat was the ADX. Have you tried using that as a market regime filter?
Uh I did oh my goodness, probably ten years ago and you know, for whatever reason didn't decide to go with it. I've not looked at it in a long time. I have got um A friend of mine who runs a small hedge fund that I uh believe uh at least was using. I don't know if he's still using the ADX as a regime um indicator. Uh he was having good success with it about a decade ago. Right okay. Uh but'cause I don't know if he's still using it or not.
Now you already touched on this a little bit about the um adjusting the the setups for loose versus stringent basically. on a regime. But how can that actually be uh can you give us a bit more information on how these strategies can be adapted depending on the different types of regimes that we may see?
Right. I mean that tends to be my you know, let's just I'm gonna pick on let's say we have our two regimes our bear and a bull market. So, you know, I developed a strategy for a uh bull market and then for a bear market I notice, you know what? Instead of, you know, maybe let's just say I'm using the two pair r size less than ten, and I say, you know, I want to be
I want my steps to be much more pulled back and gives me much better chance that they'll actually bounce. So I'll say a two pair R size less than one. Um I may also look at other, you know, usually I'm using more than one um measure for uh for mean reversion. So you know if I was also using uh down days, let's say I was in a bull market, I was using well the uh stock also has to be down two days in a row.
Maybe in a bear market, I say it's gotta be down four days in a row and also be two pair hours less than one. So I those are the kinds of things I do. Another thing that I didn't mention I also do uh in one strategy I'm doing is doing a bear market, I'll cut my position sizing in half. So I still use the same um I'll I use a different set of parameters, so I use more stringent parameters and I cut my position sizing in half. So um that's another way of just doing with two different um regimes.
¶ Ranking Trades and Sizing Positions
Yeah. Okay. Um now so I I trade mean reversion strategies on the ASX stocks and um sometimes you can get a lot of signals come through all at once depending on what the market is doing and uh y you may not have enough uh ac account size to take all those trades at once. So what do you do uh about when you get a lot of um signals at once? Do you rank them somehow?
Yes, I mean at the end of the day you gotta figure out which ones are giving you the best uh are giving you the best
Returns.
Uh the most common ways I do I use are I use the hundred day historical volatility to rank. So I'll prefer higher volatile stocks over lower. Um I'll look at the recent return. So I'll look at let's say a three or five day return and I look for stocks that have dropped the most over the last three or five days. Uh and also you can use um
your mean reversion. So if you're using something like RSI, a rolling draband or a stretch for the moving average, you can you know you can prefer the ones that have been stretched out the most, you know, the lower RSI, the one that's farther from the moving average, the one that's the percent B that's smaller. So those tens of things I are the ones I prefer. Um ninety percent of the time um I end up with using the hundred day historic volatility. That seems to work best for me.
is, you know, I want the more the stock that's bouncing around the most, that's the likely the ones going to give me the biggest return.
Yeah, but I guess though then that that kind of impacts your position sizing as well because you're looking at the the I guess depending how you your position size, obviously, but if you're going for the more volatile ones, that can impact uh your position size. So How do you uh take that into account?
Yeah, so position sizing is interesting. Um there are you know there are two general ways of doing the position sizing I'd say that most people do. One is a fixed percentage, so If I got a hundred thousand dollar portfolio, you know, and I want to trade, you know, I want to trade, let's say, 10% per position. So I've got a maximum of 10 positions. You know, very simple, nothing involved, you know, it's just, you know, straightforward. Doesn't matter how volatile your stock is.
Doesn't matter how you know what price your stock is or anything like that. You just do ten percent. That is my preferred method and I'll explain why in just a minute. The other one's volatility based or in a sense of, you know, depending on how volatile a stock is, you uh you know, more volatile stocks you end up, you know, sizing smaller because, you know, they can move more, they can you can potentially lose more.
Uh the reason I don't do anything volatility based is in most of my research i I find that If it adds anything, it it adds it adds very little um to the total returns or to the drawdowns. Um and I tend to be simple. Yeah, if I'm not getting a bang for my buck for adding something more complex, I'll sit with something simple. And This, you know, doing the fixed percentage is just much simpler. I tend to get better returns for my strategies that way. Um
And you know it it and that also helps in a sense when you know for my ranking, you know, my higher volatility stocks then I'm in and they tend to do better. So those that's just the way I do uh my position sizing.
¶ Position Concentration and Luck
Yeah, okay. So if you're looking at say, um I think you just said uh ten percent uh of account size as a a fixed percentage, then do you do you kind of have a maximum number of positions that you're willing to take to keep the portfolio risk in check?
Yeah, so that this is where it gets very interesting. I mean, um, yeah, so depending on your strategy, you may say, you know what, I wanna do ten percent per position, or you may say I wanna do five percent per position.
you know, that would be equivalent to having up to twenty positions. Or you could be really aggressive and say, I wanna do twenty percent per position, which is the equivalent of doing a maximum of five positions. Um In general, what happens is as you concentrate down and you have more position size, your return will go up.
along with your drawdowns. And a lot of people get drawn to having um, you know, five positions only. I have a a trader friend of mine that really kind of gets drawn to the smaller number of positions. But the problem I um you have when you get to smaller positions is you are now at more of the whim of luck. And what I mean by that is if you get a good trade or a bad trade with five positions, it's gonna have a much more larger impact than if you had let's say 20 positions at 5% apiece.
So um yeah, your your results can be dramatically different. From another person trading almost the exact same thing, but because you either got lucky and, you know, got a stock that went up a hundred percent, or got unlucky and got a stock that went down ninety percent, your returns have now been drastically changed.
So that is something one needs to be careful with. Um and also what happens is when you've done optimizations with a with five positions, you're also tending to look at the strategies that got lucky. And you're more likely to pick a strategy that just got lucky during your back test period.
Um, so you know, that's you know, I think, you know, if you're at 20 positions uh or five percent each, you're you know, you're less at the whim of luck, which uh as most traders don't want to admit, but there's still a lot of luck in our trading.
Yeah. That's an interesting point to make to consider that. So how many positions do you think is too much? Like there must be some kind of um level where the uh uh the efficiency is at its maximum and then it becomes
I mean, really?
Yeah.
Yeah, I mean it it really depends on your strategy and your signals. Usually I find between fifteen and twenty starting to push it on just having it's just having too much. And it also becomes an execution, you know, unless you've got some sort of semi automated or automated way of placing orders, you know, placing up to twenty orders a day
can get really tedious and um very error prone. Yeah. So, you know, um I usually tend to limit, you know, anything on the fifteen to twenty. And personally, usually I do uh between ten and twelve is my normal number of positions. Or if I'm doing five um then I will um d just trade a much smaller portfolio because it knowing that I am at the WIM up block a lot more.
Yeah. And what about um market regimes? Do you ever look into adjusting the number of positions based on the regime?
Actually I've never done a uh look at that to s uh to try that. That's a great idea, but uh something I've never tested before. We'll have to write that one down.
¶ Market Versus Limit Entry Orders
All right, cool. Well how about we talk a little bit more about entries? So once you have a setup, do you look to enter on the open of the next bar or at a limit? Or how do you actually manage that?
Yeah, so I mean we've spent a lot of time talking about our setups and we're finally now gonna be entering our positions. Um this I do both actually. My current uh strategies I'm trading, I got two main reversion strategies I'm trading, and one of them I trade at the open.
And one I trade um on limits um such that the stock needs to sell off further down intra day. Uh both of them have you know, both of them have their advantages and disadvantages. Uh they're trading at the open. Uh it's nice because you you know you're gonna get that position.
Uh it's the bad part about trading at the open is you tend to be uh you know, you have to deal with slippage. You, you know, whether you enter a market on open order or you do some sort of TWAP order or you enter a few minutes after the market opens. there's a possibility of um slippage there. So I mean that's the bad part about using that. Using a limit entry, so let's say you say um you know common thing I do is you know I enter let's say 2% below the previous day's close.
You have no guarantee the stocks don't trade down that low. Uh it may open up exactly at the previous day's price and then just take off. You know, and I've seen quite a few stocks. uh that I place limit orders, you know, does that for me. Um the advantage is though is if if you get filled, you know exactly what the price you're gonna get filled at, uh which is also, you know, you're not gonna have any uh negative slippage at all.
Uh which is great with that. I mean on a very, very rare case my price will get touched but I know I won't be you know, either I'll get a partial fill or no fill because there just weren't enough shares at that price. Um but that does not happen as that frequently. Um I'm always quite surprised how infrequent that happens.
Uh yeah. And from experience, getting filled at the low price of the day tends to be a bad omen. Um I don't know why. Even though it feels really good, well usually what happens is the next day the stock ends up going down a lot. Um Yeah.
In your uh research have you found that um do you get a better quality trades by using limits or on the open or is it kind of mixed depending on the strategy?
It's mixed on a strategy and also depends on what you're looking for, in a sense, what your definition of better quality is. Um I you tend to get bigger returns and bigger or and a higher percent correct, entering on the limit. But the problem is is you get fewer of the trades. So it's one of those you have left less opportunity.
Uh and sometimes having more opportunities is better than having, you know, better opportunities that are less. So that's why I I personally trade two mean reversion strategies, one that's trades at the open and one that trades on limits. So this way I kind of balance out those two things.
¶ Refining Entries: Volatility and Scaling
Yeah, okay. And when you're looking at a limit entry, do you just mention percentage there, but do you ever take into account like um uh volatility using an ATR?
Uh I laugh because it's it's gonna be my same song of dance I've given um probably three or four times already. Uh I've looked at that. Um I've never I have not seen any um increase in the returns that makes it worthwhile to to add the complexity. Uh I have another friend of mine who we uh we were just talking and developing a strategy
He went with the, you know, adding the volatility to adjust his limits. And, you know, he he trades quite well. And, you know, it's it's also a matter of personality.
It's a matter of deciding, you know, if you feel more comfortable saying, you know what, I like trading'cause or I like the volatility based limit, it just makes me feel better. Well, that's a good reason to do it. It may not it may be a little bit more complex, but adding a rule that will likely can make you continue to trade the strategy is a great rule in my opinion. Yeah.
Now what about scaling in um into trades? Because sometimes mean reversion trades you can get set ups um yeah in consecutive days. So what do you look at how do you manage that
Yeah, so scaling in uh is an interesting thing. So I personally don't do any scaling in. Uh I have found in general What scaling in, you know, by scaling in, normally what I mean is it's I get into the stock and then the next day I get another signal or it closes down or there's, you know, you can have multiple rules for deciding when to potentially scale into a stock.
Uh the typical rule that I look at is, you know, the stock closes below my entry price, you know, I'll think about scaling in. Uh now the reason I don't scale in. is I tend to find that the overall returns are less when I use some sort of scaling in rule. There was one advantage of scaling in that people that I know who do scaling in is it increases your percent correct.
Uh and so if you're the type of person that likes to see a high percent correct and you know uh I've seen uh strategies in the 70s to low 80s percent correct using scaling in on mean reversion, uh yeah, that's a great thing to do. Uh again Your returns will probably be less overall, even though your percent correct is higher. But this is back to what I said just to finish saying.
That high percent correct means that you're more likely to continue to trade in strategy when things go poorly. You know what? That's a good rule to add. But for personally, uh I don't use any skilling in any of my strategies.
Yeah, okay. Well what if you've got a um uh a setup and you've put in a limit order that doesn't get hit on the day and then you get another setup the next day and do you factor the previous day into it or you don't care?
Uh well if in that particular case if I get a setup I put it in the limit order, I don't get uh filled and then the next day I get another setup, I w for the same stock, I will place another limit order. That to me is not scaling in. It's just that first trade never uh happened. So I'm still trying to get into the trade. Yeah.
¶ Indicator-Based and Maximum Loss Exits
Alright, so now we're in the trades. How do we get out? There's a lot of different techniques for stops and exits. So do you want to uh tell us some of the techniques that you like to use?
Sure. Yeah, I'll I mean I'll I'll tell you some of the techniques that I use and some techniques that uh are common and why I don't use them. You know, the most common one is just using your indicator. Whatever indicator, uh mean reversion indicator you use to get in, you use it to get out. So if I use the uh you know, a sh a stretch below the moving average to, you know, let's say I got in when
the stock was five percent below the um ten day moving average, then I might get out when the stock closes above the ten day moving average. So something simple like that. So whatever indicator you use to get in, using the same indicator to get you out. Or you can use another one too um But that tends to be the most popular and the the best exit. At the end of the day, just doing that is the best exit. Uh everything else we're gonna talk about, um, all the exits I'm gonna now talk about.
In general, they will reduce your returns and not necessarily reduce your drawdowns. Uh but the reason I do some of these exits and the reason some of the people I advocate people doing some of these exits is uh these exits may make it such that you will continue to trade the strategy. And i I think the biggest failure that most uh quant traders have is not that their strategy breaks
is that they stop trading it when it does poorly. And it will do poorly, you know, it's guaranteed that you at one time or another your strategy will do poorly and it will have a drawdown as bad as you ever tested and probably worse. So anything that you can do that makes you keep trading it. Uh to me is a plus.
Yeah. And as Murphy dictates it's probably just about to turn around just as you stop trading it.
Uh yes it is. Uh I can't tell you how many times uh that's happened to me. Um so the most common um Stop is your is your maximum loss stop. You know, so it's like, okay, I I don't want to lose more than 10% or 15% or whatever that number is. Um you can do it one of two ways. Uh you could do it as volatility based, or you can just do it straight percentage. Uh in general I've found if you know
I I keep these quite far away such that they rarely get hit. Um because most of the most of the time, usually when they get, you know, if you have them close, when they get hit is right about the time it's normally gonna bounce. So um I tend to do, as you probably can already guess, a fixed percentage stop. So I'll do something like a 15% max loss.
And you know, I don't care about the volatility of the stock. But you know again, if using a volatility-based max loss stop is feels more comfortable for you, then that's what I would suggest. But understand adding that max loss stop will reduce your return.
Now if I can just ask a little bit more about uh trying to define what that level is, do you include your stops in the back test or do you do that afterwards? Or how do you fit that into the process?
Um I do it in a sense afterwards. After I've generated my back test, I'll kinda look at, okay, you know, where's where's the catastrophic ones? And it's like, okay, you know, very rarely do I get past twenty percent. Okay, let me just throw it at the twenty percent level. or whatever level it is. Um, so it's usually not something I test during the process. Um, because I know that it's just gonna it's gonna reduce my drawdowns and it's usually there just for purely comfort level.
Um, so i it's usually at some level that only affects a small number of trades and you know, it's just like okay. At what point am I gonna cry uncle? The problem is 90% of the time your or not 90% but maybe 75% of the time, your big losses don't come from steady drip, drip, drips, but from overnight gap downs that your max loss won't help you with.
D do you ever take into account um looking at uh maximum adverse excursion?
Right. I've done a little bit on that, um, but honestly I've not done a lot. You know, what little I've done didn't seem to be that I didn't seem to g be getting anywhere, but honestly I've not done that much research on using that idea.
All right, cool. So that was maximum loss stop. Um what other kinds of stops do you like to um use?
¶ Trailing Stops, Profit Targets, Bar Exits
So another common one what I don't use at all is a trailing stop. I have never this is really funny, I've never managed to get a trailing stop to work on any of my strategies, and by any I mean my breakout strategies, my trend following strategies, my mean reversion. Other people like them. Uh you know. Kudos to them that they can figure out how to make it work. But I've yet to make it trying to stop work.
at all. You know, if I put in a trailing stop in any of my strategies, it destroys the returns and works I don't know. For some reason I can't get to work. Somebody else can figure out how to get'em to work and tell me, I'd be greatly appreciated. But uh it do I I've they don't work for me and I don't use them. So that's what that's unfortunately uh my story on dwelling stock. So the next stop um is the profit targets. Uh this one I um
I don't use at all in mean reversion. Again, I I find for mean reversion it tends to be better to let those bounces bounce. Um And profit targets tend to um really cut back on your uh on your returns. So that's uh one that I don't um, you know, I have not had any success with uh that much.
So i at the top you in you mentioned the indicator based um exit. Are you uh waiting for it to close above or or break that level? Is that how you're using a indicator as a an exit?
Um right, so let's say I mean uh if I'm using let's say the two paired RSI, I may get in uh when it's under ten and get out when it's over seventy. Or if I'm using something like um a moving average, you know, I got in when it was ten percent below the moving average and I'll get out when it crosses above the moving average. So this does that answer your question?
Yeah, so you're not actually putting like the moving average price into the profit target, but you're waiting for it to break that and then you'll exit accordingly.
Yeah, basically because at the end of the day, mean reversion trade is, you know, a stretch down and you're waiting for it to bounce up and you're just looking for um, you know, that bounce up in some way to measure that bounce up. Yeah.
Alright, cool. What other types of exits are there?
So the uh this is actually one that don't see that often, but uh it's one of my personal favorites and I use it in quite a bit of my strategies, quite surprisingly so, is the um bar exit, meaning if My I if I haven't got any any exit. So normally I have an indicator-based exit and I may have a max loss exit. That's pretty typical. But I also have a I will have a bar exit. That means if neither one of those
stops have been hit after that say 10 10 days in the trade or 15 days of the trade, whatever number it is, then I just get out of the trade. That just tells me, you know what, the trade's not working out. Uh this kind of exit, as all these other you know things have done, tends to reduce the return your returns. But I also find I like this one because psychologically it's one of those it really sucks to be sitting in a tray that's just not going anywhere or going down.
So uh I've got one mean reversion strategy that I think it's after nine days. Um, you know, I'll get out. If it hasn't bounced up to get my signal exit or hasn't hit my max loss stop, I'm just getting out. Um and I find this exit works quite well psychologically to keep you in for those slow losers or the ones that just don't go anywhere and that are just sucking up capital and you're like, you know what, this isn't going anywhere, let me do something with it.
Yeah. Yeah. And what about um using like a a previous day's high as an exit?
Yeah, I mean that's that's uh another common one using you know, exceeding the previous day's high. Uh another interesting one if you can um Um if you've got get execution is just waiting for an upday, you'd be surprised, even just waiting for this the stock to close up. That tends to work quite well. Um the problem with that is your edges are really small, so your execution needs to be really good to make that work. Yep. Yep.
Okay, thanks Cesar. Now there's quite a few different types of exit techniques that you've just mentioned there, but what about when you want to combine them into um into a strategy? How do you choose the various combinations?
¶ Combining and Testing Exit Strategies
Right. So for myself, uh I tend to first test just using an indicator-based exit. Uh and I'll, you know, find, you know, whatever parameters I really like. And then at that point, I will add in I will test usually a max loss stop and a um in a bar based exits, uh just to see, you know, usually I will test and find values for those such that, you know, make it
I'm not looking to improve the system ness per se, but more just, you know, what values will they not trigger that often, but make me feel comfortable that they're there and make me it likely that I will keep trading and won't pull my hair out. Well, I don't have any more hair. But um just uh you know, so that's you know, those get added near the end.
Yeah. Okay. So when you're actually testing multiple exits, d are you combining them all together to test the interactions or do you test them individually first and see which is giving you the edge? Or how do you actually manage that?
Yeah, so I first do the indicator you know, once I found my indicator exit that I like, s I'll test the max loss separately, the bar exit separately, and then I'll combine them and just see how they all work together. Is is how I normally do it. Uh but one could easily do them all um do them together. Uh I don't test that many different values. Usually it's it's you know, I'll test like three values for each uh and just see what it is. So it's real easy if I wanted to test them all together.
Okay, thanks. So just one more question now before we get into the audience questions, and that is scaling out. Do you ever look into uh scaling out a trade as well?
Yes, I've tried a couple of different methods. Um uh So the I general idea is, you know, the stock goes up, you get out of part of your position, and then you hold on to your other half of your position or other size of your position. to you know hopefully get a bigger winner. I've tried you know scaling out intraday. I've tried um even exiting intraday.
I've tried scaling out at the end of the day, waiting for much larger. And in general I have found that scaling out has not helped the results at all. Uh I've never I've never traded any strategy where I scale out a mean reversion strategy where that I scale out on. Um so I've not um but yeah, I said, if you you find it more comfortable to use scaling out, uh that's great. But like I said, I I've not found it useful for my own trading.
¶ Lessons Learned and Resources
Alright, so now let's uh start wrapping up with some quick closing questions. What's the biggest lesson that you've learned through mean reversion trading?
Um one of the big the biggest lesson I've learned and I think I've mentioned this several times is you have to be prepared for that if if you're trading the smaller stocks, um, you know, Russell 3000 stocks or the Aussie stocks or anything like that. You gotta be prepared to wake up one morning with a fifty percent loss or worse. Um that's just the name of the game. Uh it's just much more likely to be happening.
And you know, the first couple of times that happens to you, it's really hard to deal with. Now I when it happens, I just roll my eyes and continue trading.
Yep, it's just another one. Yep. Yeah. So uh okay, what's the uh this is probably linked actually, what's the hardest part of mean reversion trading?
Uh I think z it's the same as probably a lot of other trading in in a different way. Placing the trades, like I I mentioned earlier, is sometimes you'll look at the chart and there'll be the ugliest looking charts and you'll be going, Why am I placing a trade on this? You know, you'll look at the chart and it was down you know the
Three days ago it was down five percent, the day after that was down ten percent, today it's down, you know, eight percent, and now you want me to get in tomorrow? It's like, really? It's like, okay, you know, that's that to me is the hardest part of meme reversion trading. Yeah.
And so what do you think is um the most important ingredient to becoming a successful mean reversion trader?
Uh a strong stomach. Ha ha ha.
और दो दो दो दो दो दो दो दो
I I I had a for a while I had a post it on my monitor that just basically said, Close your eyes and push the button. Yeah. Yeah, like you said, don't look. Just close your eyes and push the button.
Okay, what about mean reversion trading books? What's your favourite?
So I've got two. Um, one of them is a book that uh I'm a co author on with Larry Connors. It's called Short Term Trading Strategies That Work. Uh I like it. It gives you a really basic overview and you know a lot of the steps we've we've discussed here are covered in the book. Um don't worry, I make absolutely zero for every sale from this book. So even if they see we sell a lot, I'm not making any money from it.
And the other book I really like is from Howard Baumy. He's got lots of great books and he's got one book I think it's literally called Meme Reversion Trading. Um, that's also quite good. Uh there are not that many books on mean reversion trading, quite surprisingly so. So those are the two I definitely would recommend.
Yeah. Okay, cool. And what's the best way for listeners to get in touch with you or to learn more from you?
Yeah, I mean they can go to my a um website, Alvarez Quant Trading. I'm always posting uh blog posts like every two or three weeks. I love answering people's questions. So if your uh question didn't get answered here, you can uh you know, um uh just go to my blog and send me uh Uh your question through that.
Yep. Okay, awesome. All right, well thanks so much for your time today, Caesar, and also uh in the the previous session that we recorded, I really enjoyed this series and I'm sure a lot of people are going to find it valuable. Now is there anything else that you'd like to mention before we wrap up?
No, other than thank you so much again. It's always a pleasure to talk to you and talk trading. Uh I can talk hours about this stuff and you know, uh we we kept these short and uh you know, like I said, I can talk hours.
Yeah, okay, cool. Alright, well thank you again for sharing all that with us, and it's also great chatting with you about training as well. So thanks again and I wish you all the best. Okay, well that's it for this episode. Thanks for listening. I hope you enjoyed the show. Come on over to better systemtrader.com. That's where you'll find all the previous episodes, all the transcribes, all the show notes, and all the free weekly trading tips. BetterSystemtrader.com
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