Switch trend following and mean reversion with an equity-curve filter

Two complete books on one market

The design runs a trend-following book and an oscillator-based range book in parallel. Each book remains a fully specified entry and exit procedure. Dual-book permission then routes attention only to the book whose equity currently clears its filter.

The trend-following book

The trend-following book is a moving-average crossover of a 10-day simple average and a 10-day time-series average, both computed on daily lows. A cross of the time-series average above the simple average is a buy. A cross below is a sell. The directional procedure is left intact and is allowed to trade only while its equity holds above a moving-average filter.

The mean-reversion book

The mean-reversion book is a 13-day least-squares cycle smoothed once with a three-day simple moving average. It sells after the oscillator rises above zero and turns down. It buys after the oscillator falls below zero and turns up. Fills occur on the close of the signal day. The oscillator book is intended for sideways markets and is gated by the same equity-average permission layer.

The equity-curve filter

The equity-curve filter is a 25-day simple average of a system's cumulative results. The design funds the book whose equity is above that average and ignores signals from the book whose equity is below it. Once a book's equity is above the average, the design enters in the direction of the latest signal. It stands aside from that book when equity later falls back below the average.

When both equity curves sit below their 25-day moving averages, the design takes no signals until at least one equity curve moves back above its average. That rule is the stand-aside state.

How equity regimes are read

Equity rising through its 25-day average on the trend-following book is treated as a trending-market state. Equity falling through its average on the oscillator book is treated as the complementary state of that range procedure being repeatedly stopped out.

Canadian-dollar workflow

On Canadian-dollar prices from 27 March through 31 August 1992, described as sideways, oscillator equity stayed above its 25-day average from 23 April through 10 July, then only briefly from 30 July through 7 August. Trend-following equity stayed below its 25-day average from 5 May through 29 July.

An overlay of the two Canadian-dollar equity curves is used to show that the trend-following book and the oscillator book occupy opposite equity regimes on the same sample.

Swiss-franc workflow

On Swiss-franc prices over the same 1992 window, trend-following equity rose above its 25-day average from 12 June through 7 August. Once equity is above the average the design enters in the direction of the latest signal and stands aside when equity later falls back below the average.