Mean Reversion Strategy in Sierra Chart — Step-by-Step Guide & Transcript

[00:00] Hi, my name is Markus. In this short video, you'll learn how to automate a simple mean regression strategy in Serachart in less than 10 minutes. This video is for educational and informational purposes only and does not constitute investment or financial advice. Let's get to it.

[00:17] Here we have a KIN chart of the September 2019 crude oil futures contract and these

[00:36] are volume based bars where every bar represents 3,000 contracts traded. Next Next we are going to add the studies from which we would like to pull the data for our

[00:50] buy and sell algorithms. First we are going to add the rolling volume weighted average price. Since this is still a common benchmark used by big institutions to measure order execution

[01:04] quality, we can leave the default settings as they are and click OK. Next we're going to add the ask bit volume different bar, which will tell us which side

[01:18] of the market is removing liquidity more aggressively. Now in the center you will see the VWAP line and above that the top band of the mean variance

[01:33] standard deviation and below that the bottom band. Next we are going to add the spreadsheet system for trading where we will create our custom calculations using the chart data and enter our buy and sell formulas.

[01:52] Click on the settings. We want to set the maximum position size to 3 and we would also like to have multiple

[02:04] entries in the same direction. So we click yes and then ok The spreadsheet will open in a new window In the columns B through E we have the price data displayed like open buy and close of

[02:29] the bar. In columns K through N, we can enter the formulas for our buy and sell entries and exits respectively. In column O, we can enter our own calculation.

[02:42] Since we want to add a condition that may indicate above average institutional activity, let's calculate the standard deviation of the volume delta bars for this purpose. We're going to enter the Excel style formula into the cell.

[02:59] Open bracket. Scroll to the cell for volume delta. Select the range. close the bracket and click OK

[03:13] and as you can see all the cells are populated for you right here in the buy entry column we want to have multiple conditions to be true

[03:25] before submitting the order First, we want the volume delta to be less than 2 times the standard deviation of volume delta.

[03:40] And we multiply this by minus 1, since we want to compare it to a negative number. And the second condition is that we want the last price to be less than the bottom standard

[04:03] deviation band. Click OK.

[04:22] Go to the chart and see what we got. There is an entry signal right there We do the same thing in the cell entry where we want the volume delta to be greater than

[04:41] And we want the last price to be greater than the top.

[05:10] the top band of the mean variance standard deviation.

[05:28] We check the chart and we see that the cell entries have been created for us. Next are the by exit, since this is a mean reversion strategy, we want to exit when the last price is greater

[05:46] than VWAP. for our sell exit, we want our last price to be less than we want.

[06:12] So now that we've entered our formulas, we can run a backtest. Before we do so, there is a little tip. We can clear all rows and columns that are not referenced in the formulas.

[06:26] And that will speed up the backtest significantly. So here I just marked all the rows and cleared the selection. And we can do the same thing with the columns that we don't need.

[06:42] Scroll over select the columns right click and hit clear selection

[06:59] Then we can go back to the chart window, click on trade and do a bar based backtest. Click on yes, click ok.

[07:13] So the bar based backtest is much faster than a tick based backtest because it only evaluates the open and the close of the bar instead of every tick inside of the bar. So the tick based backtest is more accurate.

[07:28] However it's also more demanding on your computing resources. Once the backtest is finished, we are going to open a trade activity log window to look

[07:44] at the performance of our strategy. As you can see, our strategy is actually positive, it is profitable.

[07:56] The win percentage is in the area of 70%, which we would expect for a mean reversion strategy. But at the same time, we would expect it to perform poorly in strongly trending periods,

[08:11] which would also serve as a clue how passive institutional algos that use VWAP as a benchmark would struggle when price moves away without any meaningful reversion.

[08:26] So in this case we see these big drawdowns before the trades actually close out, either with a small gain or a smaller loss.

[08:38] You can also look at the period stats. Overall, now you know how to automate a simple mean reversion strategy in Sealtrack and run

[08:53] a quick backtest in less than 10 minutes. Thanks for watching. Please also check out the next video in this mini-series on trade automation with Serachart

[09:05] or join our Seed Accelerator Pro Trader Preparation Training today.