Introducing Composite Mean Reversion Measure: The Aggregate “M” Indicator

Introducing Composite Mean Reversion and Trend Following Measures: The Aggregate “M” Indicator | CSSA 17.01.
2019, 22)34
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new concepts in quantitative research
Introducing Composite Mean Reversion and

Trend Following Measures: The Aggregate
“M” Indicator
NOVEMBER 5, 2009
by david varadi
Note: Apparently there were some questions about how to calculate Aggregate M, please email us at
dvindicators@gmail.com (mailto:dvindicators@gmail.com) to receive spreadsheet later this weekend.
Note we use a cleaner version of data than Yahoo Finance adjusted for splits and dividends with verified
closing prices. I have been made aware that the backtest results using Yahoo are different from ours (note we
calculated the same values as our readers using Yahoo Finance), and that is because their data is not entirely
accurate.
The Aggregate M indicator is based on the concept that in the long term the market trends, while
in the short-term the market is noisy, and has a tendency to mean-revert. Why not combine the
two concepts to keep life simple? The Aggregate M is supposed to reflect an adjusted median that
is filtered for short term noise. The median is a far more accurate measure of central tendency than
a simple average especially with noisy data. Taking a superior measure of trend and filtering out
some of the noise by adjusting for short-term mean reversion creates an even better median. The
Aggregate M is now both trend and mean-reversion rolled into one. In the example below the
aggregate M is simply the average of 1) 252 day PERCENTRANK of High, Low and Close values
and 2) 10 day (1-PERCENTRANK) of High, Low and Close values. This average is smoothed
using a .6 weight on today and .4 weight on yesterday. Is this robust? The S&P500 results over the
last 4000 bars speak for themselves–high accuracy, good gains per trade and a nice equity curve. In
a separate multimarket test with 20 markets going back to 1984, the Aggregate M did 27% CAGR
through 2009. Is it the best method…….probably not—I certainly didn’t spend any time
optimizing or digging as I came up with it just yesterday. Furthermore the structure can be
substantially improved. But pretty damn good for two common sense parameters!
https://cssanalytics.wordpress.com/2009/11/05/trend-or-mean-reversion-why-make-a-choice-the-simple-aggregate-m-indicator/ Strona 1 z 15
Introducing Composite Mean Reversion and Trend Following Measures: The Aggregate “M” Indicator | CSSA 17.01.2019, 22)34
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55 Comments leave one →
1. roy PERMALINK
November 6, 2009 12:50 am
looks too good to be true! ponzi?
REPLY
2. Peter Gum PERMALINK
Are the mathematical (programming) details available anywhere? (C#, Java, Metastock,. . .)
The ability to study more detail would help in obtaining a fuller comprehension.
REPLY
david varadi PERMALINK*
hi peter……i don’t have the programming details in those platforms. I simply did this in
Microsoft Excel. The Aggregate M and other indicators will be available on my site
http://www.dvindicators.com for free coded for tradestation when I launch (shortly).
cheers
dv
REPLY
Peter Gum PERMALINK
Thanks David. In comment #21 you offer a spreadsheet. I would appreciate a copy:
petergum at world.oberlin dot edu
Thank you. Nice system. -Pete
3. Frank PERMALINK
Hello David,
the result looks great. I of course wanted to reproduce this in my own environment. However i
get significantly more trades (+101.) Would you please be so kind and look at these few lines of
code of the “Aggregate M” Indicator… i can also send you an XLS if you want.
Thank you so much!

Frank
————————
h_rank_long = PERCENTRANK(High,252);
l_rank_long = PERCENTRANK(Low,252);
c_rank_long = PERCENTRANK(Close,252);
h_rank_short = 1-PERCENTRANK(High,10);
l_rank_short = 1-PERCENTRANK(Low,10);
c_rank_short = 1-PERCENTRANK(Close,10);
value = ((h_rank_long + l_rank_long + c_rank_long) + (h_rank_short + l_rank_short +

c_rank_short))/6;
AggregateM = (value[1]*0.4) + (value*0.6);
REPLY
hi frank, thanks a lot…..please see Ramon’s response which is correct……you are taking the
PERCENTRANK of each individual column while I take the percentrank of the entire array
including the High Low and Close values.
cheers
dv
REPLY
4. Damian PERMALINK

Questions:
– I assume the percentrank of the high,low,open,close is just that – a percentrank across all four
columns?
– The weighting confuses me – “This average is smoothed using a .6 weight on today and .4
weight on yesterday.” – so it’s not a straight average?
REPLY
hi Damia, it is the percentrank of the 3 columns of the H, L, C array of price. I think the
wording is a little confusing, the aggregate measure of central tendency of the two
percentiles is averaged (smoothed) with this weighting. Practically speaking, it was already
“averaged” by taking .5 times one percentile and .5 times the other. That is why I call it a
smoothing.
just semantics!
cheers
dv
REPLY
5. Jez Liberty PERMALINK
David – this looks rather interesting and novel (to me at least) concept…
A question on your charts: how do you generate them – is it from a special software/platform.
It looks really neat (especially with the 4 plots on one chart)?
Thanks
Jez
REPLY
Hi Jez, Corey my partner in crime generates these charts using Visual Basic code in Excel
etc………don’t ask me how he does it because I certainly can’t work this kind of wizardry
myself!
thanks
cheers
dv
REPLY
6. Ramon PERMALINK
Frank, this is my understanding:
rank_Long = PERCENTRANK(HLC 252 period Array, Close);

rank_Short = PERCENTRANK(HLC 10 period Array, Close);
***Note the HLC array is simply three columns of data in stead of one, i.e.
=PERCENTRANK(D9:F260,F260)
Value = (rank_Long + rank_Short)/2

AggregateM = (value[1]*0.4) + (value*0.6);
Hope this helps

Cheers Ramon
REPLY
thanks ramon as always!
cheers
dv
REPLY
Damian PERMALINK
Hey Ramon – I was looking doing this in AB – the issue is that the PercentRank function
you so nicely created can’t handle multiple arrays…any thoughts on that?
REPLY
7. Ramon PERMALINK
Hi Damian, yes you are right – need to tweak that percentRank function a little. I will post
some amibroker code I baked earlier here shortly . . .
REPLY
8. Woodshedder PERMALINK
November 6, 2009 1:25 pm
Can’t wait to see it Ramon. Thanks!
REPLY
9. Jeff PERMALINK
Excellent, as usual. Jeff
REPLY
10. John French PERMALINK
I am using NDO on SPY (actually MOC is not a whole lot different) with Yahoo data (Date, O,
H, L, C in columns a-e). Formulas are
H=PERCENTRANK(C21:E272,E272) (hard-coded to 252 for the time being)

I=1-PERCENTRANK(C263:E272,E272) (hard-coded to 10 for the time being)
J=(H272+I272)/2
=(J272*$K$19)+(J271*$K$18) – where K19=0.6 and k18=0.4
I get a CAGR of ~12
REPLY
hi john, did you also go short? Did you go back to 1993? i can assure you the results i have
are correct.
cheers
dv
REPLY
John French PERMALINK
David, I am shorting and my data does go back to 1993 but due to the lead of 252 days
my first trade is a short on 3/17/94. I can send you my ss if you want (if you don’t I
understand!)
I am sure I am doing what Ramon is doing…

hi if you send me an email i can forward you a spreadsheet to match up with Corey’s
cheers
dv
Jason PERMALINK
Hi David,
Can u send me a copy of your spreadsheet as well, it looks very interesting.
my email is lazyboy1628 a t yahoo d ot com
Frank PERMALINK
Hi David,
i received the XLS, Thanks. Backtesting the strategy/indicator on my own platform will
result in a different performance. Largely due to the fact that i’ve got different data.
What’s YOUR data source / provider?
Regards,
Frank
11. Ramon PERMALINK

Ok guys, the appropriate High-Low-Close PercentRank function for Amibroker is below.
Please note that this function ranks whatever is provided in the ‘Data3’ argument, so an
example function call would that ranks the close would be:
Value1 = PercentRankHLC(High,Low,Close,252);
Enjoy!
cheers
Ramon
function PercentRankHLC( Data1,Data2,Data3,Periods )

{
Count = 0;
for ( i = 0; i Ref( Data1, -i ), 1, 0 );

Count = Count + IIf ( Ref( Data3, 0 ) > Ref( Data2, -i ), 1, 0 );
return 100 * Count / (Periods*3-1);

}
REPLY
js PERMALINK
Hi Ramon,
Thanks for your function! Seems like you lost a couple of lines when pasting, guess it
should be like this?

{
Count = 0;
for (i = 0; i Ref( Data1, -i ), 1, 0 );

}

}
Regards
js
REPLY
js PERMALINK
Paste error, happened to me as well trying again. Regards js

{
Count = 0;
for (i = 0; i Ref( Data1, -i ), 1, 0 );

}

}
js PERMALINK
…i Ref( Data1, -i ), 1, 0 );
js PERMALINK
function PercentRankHLC(Data1, Data2, Data3, Periods)
{
Count = 0;
for (i = 0; i < Periods + 1; i++)
{
Count = Count + IIf(Ref(Data3, 0) > Ref(Data1, -i), 1, 0);
}
}
12. Ramon PERMALINK

hmm, looks like the paste of the code didn’t work properly, if you want the code email me at
ramon a t minkcapital d ot com
REPLY
Woodshedder PERMALINK
U da man Ramon! Thanks…email on its way…
REPLY
darshan PERMALINK
July 29, 2010 12:50 pm
Hello Ramon,
can you please repost the full formula !
Oh god …i am too late..
thank you
*sorry for trouble
REPLY
13. Kevin PERMALINK
Hi David,
I note that the results are critically dependent on the data quality. Also, on whether the
instrument is tradeable. I once found a simple system with incredible results on the ^DJI index
before being disappointed to find that it did not work on the ETF. This was due to the highs
and lows on the index calculated as the mean of the component highs and lows without
accounting for the time they were made.
Anyway, could you give a hint on what you mean by improving the structure? Is it to do with
taking more trend and countertrend components or something to do with the averaging?
Thanks
Kevin
REPLY
hi kevin, improving the indicator is something that can be done at many levels…….first the
choice of periods is somewhat arbitrary, as is the number of different periods to take into
account. The weighting placed on each period is also arbitraray and not per se optimal.
Furthermore the assumption of mean reversion on a short term window may or may not
hold true for a given instrument at a given time.
i could go on, but i can’t give away all the secrets! :o)
cheers
dv
REPLY
14. Woodshedder PERMALINK
I have run this strategy over my data, (I use Norgate), and I get approximately 12% CAGR. As
best as I can tell, there are at least several reasons for the discrepancy between DV’s results and
mine.
1. DV is using dividend adjusted data. When dividends are re-invested and compounded, it is
going to make a noticeable difference in returns.
2. The start date of testing. Unless you have specifically programmed your backtester to use
4000 bars, your results may be different. Also, several market days have passed since this
article is published, and so now you may need to use slightly more than 4000 bars to replicate
the results.
3. DV hasn’t covered this, but it is worth noting. For these types of setups, I require a cross of
the AggM above 50. What this means is that when the testing starts, without requiring a cross,
your platform may see that the AggM value is over 50, and therefore initiate a long trade. In
real-time, you wouldn’t have taken the trade on that day. If you are not requiring a cross, this
will also affect the beginning of the backtest and may cause your results to be slightly different
from others.
4. Some platforms will make you wait until there are enough bars to calculate the averages,
while other platforms, if not specifically told not to, will look back further than 4,000 bars so
that the averages will be calculated. This too will cause discrepancies.
REPLY
Woodshedder PERMALINK
Whoops, messed up #2.
What I meant to say was that since some market days have passed, you’ll have to set your
backtester to test from 12/20/1993-11/04/09, or else new data will be included.
REPLY
15. Kevin PERMALINK
Hi David,
Thanks, that’s very useful. I will do some walk forward optimization and see if I get anything
worth sending over. FWIW I get 11% CAGR also using Yahoo data on the SPY.
Kevin
REPLY
16. kostas PERMALINK
November 10, 2009 12:07 am
In the algorithm the treatment of the short-term “noise”/mean reversion is “=1-
PERCENTRANK(C2:E11,E2)”. David, why the “1-” formulation>
REPLY
17. kostas PERMALINK
November 10, 2009 12:41 am
Hi DV–A question regarding your testing: Did you model the buys to take place at the open Or
the close of the day AFTER the signal switch? (Hopefully NOT on the same day at the close–
right?)
REPLY
18. Jack PERMALINK
Can you list the 20 markets that you used in the separate test ?
REPLY
Corey PERMALINK*
Hi Jack, The markets traded in the separate test were:
(all Futures) S&P 500, Nasdaq 100, Gold, Silver, Copper, Oil, Heating Oil, Natural Gas,
Gasoline, Corn, Wheat, Soybeans, Cotton, Coffee, Cocoa, Live Cattle, Lean Hogs, Sugar,
Australian Dollar, Pound, Yen, Euro, Swiss Franc.
REPLY
19. Dave PERMALINK
December 8, 2009 7:39 pm
Hey all
Looks like I’m late to the party on this one. I’m fascinated by this and would really like to play
around with it. I’ve attempted to apply it to excel, but it’s not working for me. I was wondering
if a kind soul had an excel sheet with the formula working that I could use as a base. My email
is do d*t evans at yahoo d*t co d*t uk
Thanks in advance
Dave
REPLY
December 8, 2009 7:54 pm
hi dave, go to my site http://www.dvindicators.com and im sure there are a few people
who can help you.
cheers
dv
REPLY
20. Joe Marc PERMALINK
December 16, 2009 9:23 am
David/Corey
I am not anywhere near you folks on math/computers etc. Simple question from a simple guy.
I have been daily/manually updating AG M with Excel since I got it (about 7 weeks now), and
I have had consistent reading >.5
Is this correct? Does that jibe with your readings?

Just checking.
Many, many thanks
Joe Marc
REPLY
21. Scott Gearhart PERMALINK
February 4, 2010 12:26 am
Could I get a copy of the XLS for he Aggregate “M” Indicator?
Thanks
Scott
REPLY
22. Kevin PERMALINK
March 3, 2010 11:13 am
David:
Could you send me your Agg M excel spreadsheet as well?
Thanks,
Kevin
REPLY
23. Larry PERMALINK
April 13, 2010 9:21 pm
David or Ramon, I need clarification on how the PercentRank works across 3 columns. The
Excel help file only illustrate its use on one column of data.
It seems to me that if each ROW is looking for one value to rank, then the Close is superfluous
as it always will fall within the values for High and Low.
Is Percent Rank averaging the three columns? i.e (H+L+C)/3 and then ranking that row as
compared to other rows?
Thanks, keep up the great posts!
REPLY
24. Ramon PERMALINK
April 14, 2010 4:25 am
Hi Larry,
When you percentrank across three columns you are actually ranking all the data as if it were
in one column or array – therefore the close will have an impact as it will increase the number
of data points across which you are ranking.
Hope this makes sense!
Ramon
REPLY
25. Yo-Man PERMALINK
April 19, 2010 1:47 pm
Hi David,
I discovered this website through Dr. Steenbarger’s Traderfeed. I found the works here very
interesting and would like to receive a copy of the XLS spreadsheet if possible. My email is
ymanyen@gmail.com
Thank you,
Yo-Man
REPLY
26. Brian PERMALINK
July 15, 2010 12:21 am
Hi David,
I’m in the process of my thesis study which tests a number of publicly available trading
strategies/indicators in Tradestation against the forex market (daily and intraday) and would
love to be able to try this indicator out. I have a few questions/comments if I may:
1. Will Aggregate M work on other markets besides the S&P500?
2. Will it work intraday as well as it does daily?
3. If the spreadsheet is still available, I would greatly appreciate a copy. You can reach me at
BrianLeip at G m-ail.
4. It would be preferable to understand some of the methodology behind the indicator (as with
all the other strategies/indicators I am using) rather than just relegate it to a “black box”. Are
there any blog posts/write-ups re: methodology that I could review?
Thanks in advance for your time. It looks quite impressive by the way
– Brian
REPLY
July 15, 2010 2:32 am
hi brian, i will get back to you on this. please send me an email personally.
best
dv
REPLY
27. Omar Westerberg PERMALINK
July 4, 2012 10:04 am
Hi, thanks for the post. If the spread sheet is still available I would enjoy a copy to evaluate the
methods to use with pairs and some other arbitrage techniques. If available please send to
o.westerberg@gmail.com
Thanks, Omar
REPLY
28. Clyde PERMALINK
May 11, 2013 4:45 pm
You could certainly see your enthusiasm within the work you
write. The world hopes for more passionate writers such as you who aren’t afraid to say how
they believe. All the time go after your heart.
REPLY
Trackbacks
1. Trend or Mean-Reversion? The Strategy Allocation Problem (part 1) « CSS Analytics

2. Varadi’s Aggregate M Indicator: Get Thee to Cash | System Trading with Woodshedder
3. Varadi’s AggM Indicator Suggesting a Move to Cash | System Trading with Woodshedder
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Introducing Composite Mean Reversion and Trend Following Measures: The Aggregate “M” Indicator | CSSA 17.01.

new concepts in quantitative research

Introducing Composite Mean Reversion and

Thank you. Nice system. -Pete

Thank you so much!

value = ((h_rank_long + l_rank_long + c_rank_long) + (h_rank_short + l_rank_short +

AggregateM = (value[1]*0.4) + (value*0.6);

November 6, 2009 7:35 am

rank_Long = PERCENTRANK(HLC 252 period Array, Close);

Value = (rank_Long + rank_Short)/2

Hope this helps

H=PERCENTRANK(C21:E272,E272) (hard-coded to 252 for the time being)

=(J272*$K$19)+(J271*$K$18) – where K19=0.6 and k18=0.4

I get a CAGR of ~12

I am sure I am doing what Ramon is doing…

david varadi PERMALINK*

Can u send me a copy of your spreadsheet as well, it looks very interesting.

my email is lazyboy1628 a t yahoo d ot com

What’s YOUR data source / provider?

11. Ramon PERMALINK

November 7, 2009 7:43 am

function PercentRankHLC( Data1,Data2,Data3,Periods )

for ( i = 0; i Ref( Data1, -i ), 1, 0 );

return 100 * Count / (Periods*3-1);

function PercentRankHLC( Data1,Data2,Data3,Periods )

for (i = 0; i Ref( Data1, -i ), 1, 0 );

return 100 * Count / (Periods*3-1);

function PercentRankHLC( Data1,Data2,Data3,Periods )

for (i = 0; i Ref( Data1, -i ), 1, 0 );

return 100 * Count / (Periods*3-1);

12. Ramon PERMALINK

can you please repost the full formula !

Oh god …i am too late..

Is this correct? Does that jibe with your readings?

Could you send me your Agg M excel spreadsheet as well?

Thanks, keep up the great posts!

Hope this makes sense!

1. Trend or Mean-Reversion? The Strategy Allocation Problem (part 1) « CSS Analytics

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AggregateM = (value[1]0.4) + (value0.6);

=(J272$K$19)+(J271$K$18) – where K19=0.6 and k18=0.4