Reversion Strategies
Popular reversion strategy trading rules you may have heard:
- “Buy low and sell high”
- “You never get poor taking a profit”
- “Bulls win and bears win, but hogs get slaughtered”
- “It can’t go much lower”
- “Sell when everybody else is buying and buy when everybody else is selling”
Reversion strategies, attempt to take advantage of an upcoming trend. A simple trending portfolio management strategy might have these rules:
- Purchase 10 stocks with largest percent loss over last 5 days.
- Keep all account equity in stocks
- Re-screen for largest loss weekly
- Rebalance weekly, selling stocks that fall out of big loss 10, buying stocks that are new to big loss 10, and bringing all 10 positions to 10% of account equity.
Reversion strategies win when markets oscillate. The trend has to reverse for gains to be realized. Reversion strategies assume market is like a pendulum. Stock price can only move so far in one direction before it is pulled back in the other direction.
The Trend Regression Portfolio Strategy detailed in DIY Portfolio Management is a reversion strategy. Results of Trend Regression Portfolio Strategy paper trading and trading are on the next page.