NASDAQ Mean reversion symphony template

In this article, you'll learn about the NASDAQ Mean reversion symphony found in the Composer template library.

Symphony overview

This symphony is an example of a mean reversion strategy. It capitalizes on performance dips in QQQ, an ETF made up of the Nasdaq-100, the 100 largest domestic and international non-financial companies on the Nasdaq stock market, by buying TQQQ, an ETF which seeks a return that corresponds to 3x the daily performance of the the Nasdaq-100.

Because TQQQ is a 3x leveraged version of QQQ, its price and returns typically rise and fall three times as much as those of QQQ for a given time period. For example, if the price of QQQ rises $1, the price of TQQQ will rise approximately $3, and if the price of QQQ falls $1, the price of TQQQ will fall approximately $3.

In addition, this symphony uses BSV, a short-term bond ETF, as a replacement for holding cash. However, cash could be used in place of BSV if this symphony is traded manually. 

How does it work?

This symphony is traded daily.

Every day, the first IF statement checks whether the 5-day cumulative return of QQQ is less than -5%. This low return is taken as evidence of a current dip in Nasdaq-100 performance.

The second IF statement checks whether the 1-day cumulative return of TQQQ is greater than 5%, which is taken as evidence that the Nasdaq-100 is likely already exiting its dip in performance. If this is the case, the full weight of the symphony is assigned to BSV (cash can be substituted if trading manually).

If the 1-day cumulative return of TQQQ is not greater than 5%, which is taken as evidence of a continued dip in Nasdaq-100 performance, the full weight of the symphony is assigned to TQQQ to capitalize on this dip, with the assumption that the Nasdaq-100 performance will likely improve and TQQQ will rise.

If the 5-day cumulative return of QQQ is not greater than -5%, taken as evidence that the Nasdaq-100 is not currently in a dip, then the full weight of the symphony is assigned to BSV (cash can be substituted if trading manually).

Video explanation

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