A reader recently suggested leaving the limit orders for a mean reversion trade on for a couple of days. Typically, these orders are good only for one day unless the stock sets up again. I did not think that this would help but as I always tell my consulting clients when they ask me if an idea will work or not, “I am always surprised but what works and what doesn’t, so I test everything and let the numbers decide.” My expectation would be higher exposure but will this lead to higher returns?
The Concept
In the typical mean reversion tests that I do, a stock has a pullback. Then on the next trading day, a limit order is placed X% below the previous close. This order is good for a day only.
The change is that the limit order is placed and left there for N days. This is now giving the stock a couple extra days to have the selloff.
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Good Quant Trading,
Cesar
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