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130 – Building Mean Reversion trading strategies with Cesar Alvarez – Part 2

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And we’re back for the 2nd episode in this 3-part series on building Mean Reversion strategies with Cesar Alvarez from Alvarez Quant Trading.

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 how to combine indicators to identify better quality trades.

If you haven’t listened to that episode yet, you should check it out first here.

In this 2nd episode in the Mean Reversion series, Cesar will be sharing:

  • How to classify market conditions and adjust Mean Reversion strategies to the current market,
  • Tips to choosing trades with a higher probability of success when you have more trades than your account can take,
  • How the maximum number of positions you trade affects the role of luck on trading results and how to produce more ‘reliable’ results instead,
  • 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,
  • The impacts of stops on returns and why they don’t often protect you from the really big losses,
  • Implementing multiple exits, what works best in Mean Reversion (and what to avoid) and testing exit combinations.

Watch out for the 3rd episode in the series, where Cesar answers all the questions submitted by Better System Trader listeners.

‘For mean reversion, it tends to be better to let those bounces bounce’ – Cesar Alvarez

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Resources

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‘Adding a rule that will make you continue to trade the strategy is a great rule in my opinion’ – Cesar Alvarez

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‘An error a lot of people do is trying to make a strategy that works in all market types’ – Cesar Alvarez

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‘Adding a max loss stop will reduce your returns’ – Cesar Alvarez

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Episode Released:

29 October 2017

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Comments

  1. I loved the first episode but now I am a bit puzzled… Cesar is quite a gunslinger!
    He is running two long only and likely correlated mean reversion strategies on US small-medium cap, buying those that fell heavily in the last few days. He does not adjust the size in relation to the volatility of the stock, on the opposite his ranking system favors to buy the most volatile stocks.
    In other words he is looking for the heaviest and fastest falling knife. Wow.
    Cesar is not bothered when one of his position is down 50% and that’s fine, but how to cope with an October 6th – 10th 2008 scenario? He would entry long on the worst stocks and then many of those collapsed. This kind of events do occur from time to time and it’s essential to take it into account.
    Cesar is surely aware of the risk he is running but this topic has not been addressed, I hope we will find something about it in the third part of the interview.
    Thank you as always for your amazing work.
    Marco

    • Hi Marco, thanks for the comment.

      Cesar and I discuss risk management more in the 3rd episode (episode 133), so take a listen to that, hope it answers your question/concerns.

      Cheers!

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