When XLP Diverges From Recent High And Low: A Mean Reversion Trading Strategy Explained

A while back I wrote about a day trading strategy in SPY. This one works pretty well on XLP as well, with some modifications:

The high and low divergence mean reversion trading strategy

The strategy is like this in plain English:

Trading Rules

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1. Calculate a 25 day average of the (High minus Low – (H-L)). That is the “ATR”.
2. Calculate the Low of the last 10 days.
3. Calculate the (C-L)/(H-L) ratio every day (IBS).
4. Calculate a band 2.5 times above the 10 day low using the average from point number 1 (ATR).
5. If XLP closes above the band in number 4, and point 3 has a higher value than 0.8, then go short at the close.
6. Exit on tomorrow’s close.

Vice versa for long except the value in number 3 must be below 0.33.

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Test period from 2005 until 2013. Here are the results:

Long:

	Total %		#Fills	#Wins	Average
	53.57363		161	106	0.333

Profit curve:

Short:

Total P/L		#Fills	#Wins	Average
49.03834		237	141	0.207

Equity curve:

By the way, this strategy has been horrible in 2013 on the short side (live trading).

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FAQ:

– What is the core concept of the high and low divergence mean reversion trading strategy?

The core concept of this strategy involves calculating the average true range (ATR), the recent low of the asset, and the (C-L)/(H-L) ratio daily. It uses these metrics to determine whether to enter long or short positions based on specific criteria.

– How is the ATR (average true range) calculated in this trading strategy?

The ATR is calculated by finding the average of the daily differences between the high and low prices over a 25-day period. It serves as a measure of price volatility.

– What are the specific entry and exit criteria for long and short positions in this strategy?

For long positions, XLP must close above a certain band, and the IBS value should be below 0.33. Conversely, for short positions, XLP must close above a different band, and the IBS value should be above 0.8.