Thesis in Brief
Mean-reversion is one of the most time-tested ideas in systematic equity trading: when a stock falls to an oversold extreme (RSI below 30), buyers tend to step in and push it back toward fair value; when it reaches overbought territory (RSI above 70), the reverse applies. The strategy applies this logic across a 24-name universe of liquid large-caps spanning technology, financials, healthcare, consumer staples, and energy.
The universe choice is deliberate — highly liquid names reduce slippage and keep execution clean, while sector diversification ensures the signal isn't just riding one macro theme.
Backtest Performance
Over 451 trading days, the backtest produces a total return of 14.73% (7.98% CAGR), a Sharpe ratio of 0.58, and a win rate of 70.59% across 38 trades. Maximum drawdown sits at 15.64%, which is on the higher end for a strategy that trades infrequently — it suggests individual positions carry meaningful downside when the reversion call is wrong.
Turnover of 879% annualised is worth flagging: for a strategy that executed only 38 trades in 451 days, that figure likely reflects position sizing mechanics more than genuine churn, but it warrants monitoring as the portfolio scales.
Walk-Forward Validation: A Caution Flag
This is where the picture becomes more nuanced. The walk-forward test splits the history into four sequential folds, and the strategy fails validation.
| Fold | Period | Return | Sharpe | Max DD | Trades |
|---|---|---|---|---|---|
| 1 | Aug 2024 – Jan 2025 | +2.06% | 0.57 | 4.24% | 8 |
| 2 | Jan 2025 – Jul 2025 | +11.10% | 1.32 | 10.53% | 10 |
| 3 | Jul 2025 – Dec 2025 | +2.21% | 0.46 | 8.80% | 6 |
| 4 | Dec 2025 – May 2026 | −2.84% | −0.33 | 14.96% | 10 |
Three of four folds are positive, and fold 2 is genuinely strong (Sharpe 1.32). However, the most recent fold — the closest proxy for live conditions — is the weakest by every measure. Out-of-sample return is −2.84% with a Sharpe of −0.33, and drawdown in that period reached nearly 15%.
The probabilistic Sharpe ratio (PSR) of 0.785 means there is roughly a 22% chance the true Sharpe is zero or negative. The deflated Sharpe ratio (DSR) of 0.304, which penalises for the number of strategy trials run, is the more telling number — it signals that the in-sample Sharpe is not statistically robust once multiple parameter combinations are accounted for.
Recent Live Activity
The strategy has been dormant since a WMT buy on 31 May 2026. Six consecutive scheduled runs (26 June – 3 July) executed zero trades, with the portfolio holding $7,569 cash against a total value drifting between roughly $9,848 and $10,024. This is not necessarily a problem — RSI extremes in large-cap names are genuinely rare in a trending or low-volatility market — but extended silence also reduces the sample of live data available to distinguish skill from noise.
Outlook
Mean-reversion has an intuitive edge and a respectable in-sample win rate, but the validation result is a yellow flag that should not be ignored. The negative most-recent fold and low DSR suggest the strategy may be over-fitted to the 2024–2025 volatility regime. Before increasing position sizing or expanding the universe, it would be prudent to see at least one more full market cycle of live paper-trading — particularly through a sustained trend or a sharp risk-off episode — to confirm the signal holds outside its training window.