Here is one last look at the unbounded DV-2 strategy by CSS Analytics to demonstrate the larger concept of Equity Curve Switching. From the last post (here), I took the two best equity curve results, namely those from the Raw DV-2 (blue) and the Opposite-Direction (purple) strategies, and then overlaid a simple switching routine based on the higher short-term rate of change among the two.
The result is the orange equity curve (simple, frictionless returns). Obviously, this type of system-level trading overlay will work best when the alternative curves present persistent offsetting periods of over/under performance.
In that last follow-on DV-2 post, I referenced the importance of "knowing your trading environment." Now imagine a similar system to the one described above that perennially checks and compares the performance of basic trending, break-out and mean-reverting strategies. In this regard, a good recent companion thought piece to this post may be found over at MarketSci on the State of Mean-Reversion Systems.
I've about beat the unbounded DV-2 indicator to death at this point (with respect David)! In the future I will work with the bounded variant.
Note: This post was originally published as an ETF Rewind 'subscriber-first' article delivered over the weekend. This will be my new practice to provide added value to my members.