Event driven back-testing with mean reversion trading strategy

Back-Testing Mean Reversion Trading Strategy with Threshold Value — Energy Series

Support & resistance levels thresholds for trading signal generation

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Mean reversion actually is originated from regression toward the mean. We always tend to apply our intuition for devising a trading strategy and that is perfectly all right. Considering if markets have been on roller-coaster ride, moving up/down all the time, the first thing our intuition will guide us, that probably it will continue to move in the same direction. Fundamentally that leads to trend following strategies. On the other hand, there is mean reversion which comes from the argument that, poor performing stocks will perform well in the subsequent periods and vice versa. From my experience, the best way to understand the nitty gritty of strategy is to actually implement it.

Jeremy Siegel uses the term “return to the mean” to describe a financial time series in which “returns can be very unstable in the short run but very stable in the long run.”