This post is about the impact of survivorship bias on various types of strategies. I want to look at mean-reversion as well as trend-follow strategies to see how their performance gets impacted by using today’s stock index constitution vs. a historical correct definition aka survivorship bias free.
The 2-day mean-reversion trade, e.g. RSI2 or DV2 has become very popular. Though the performance of this trade has weakened lately (during 2011). So the twenty thousand dollar question becomes: Is the edge of this trade gone or is it about to resume?
With this post I want to share an observation I’ve made by tracking my Trend Strength Indicator (TSI). TSI is a non-directional trend strength indicator. A lower TSI is indicating a tendency to mean-reversion while a higher TSI is indicating follow-through action. Read more about TSI [here].