I think knowing systematically what kind of market regime we are in and what type of strategies will be favored and by how much will be extremely helpful on several fronts.
Following tables has the results of a mean reversion strategy categorized by different levels (deciles) of market volatility for 3 markets - SPY, QQQ, DIA. (1990 - July 2012).
Long Trades
Short Trades
I used the historical volatility of the underlying market for measuring its volatility and stochastic oscillator for timing mean reversion trades. As such it does not matter whether the oscillator is Stochastic or RSI or N day low etc. Same applies for volatility indicator. The results are friction less (i.e., no commissions) and signals are generated end of day.
Some observations from the results:
- The higher the volatility of the market, the better the performance of the swing trading system on nearly all metrics i.e., profit factor, average trade return, average win/loss ratio and to some extent on percent profitable trades as well.
- Consistency of performance improvements i.e., 30% volatility regime has better stats then 20% volatility regime and 40% regime over 30% regime and so on.
- Third important factor is the numbers corroborate the logical reasoning that for swing trading to work better first there need to be good sized swings (higher volatility) in the market.
I look forward to hear your thoughts on this i.e., your observations, thoughts on how one can use this information and any suggestions/comments on what else would be interesting to quantify.
It is in giving that we receive ~ St Francis
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