Using R-programming, for the purpose of illustration, I am customising a mean reversion trading strategy which involves the use of z-score:
- z-score >2.25: overbought (“sell signals”)
- z-score<-2.25: oversold (“buy signals”)
High-level visualization of the proposed trading strategy (using OKA Corporation as an example):
There may be a number of trading signals that have been generated based on the above set of rules. However, the number of trading actions (i.e actual buy or sell transaction) may be far less if it is assumed that one does not buy what one already owns, as well as one does not sell what one does not have. Moving forward, there is a need to (i) back-test this strategy; (ii) benchmark against other trading strategies; and (iii) optimization of this trading strategy.
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