New Paper: The IBS Effect: Mean Reversion in Equity ETFs

I finally finished the first draft of my IBS paper. The results are quite interesting and extremely relevant if you trade equity ETFs. You can read it here.


I investigate mean reversion in equity ETF prices at the daily frequency by employing a simple technical indicator, Internal Bar Strength (IBS). IBS is based on the position of the day’s close in relation to the day’s range. I use it to forecast close-to-close returns with statistically and economically significant results for most instruments. A simple strategy based on IBS generates an average alpha of over 30% p.a. before transaction costs. I show that equity index ETFs have had strong and consistent mean reverting tendencies since the 90s, and that these effects can be exploited as part of a profitable trading strategy. The IBS effect is stronger during times of high volatility, in bear markets, after high-range days, after high-volume days, and early in the week.

Feedback is highly appreciated, either in the comments below or by email to qusmablog at gmail dot com.

Some of the interesting things you’ll find within:


IBS plotted against average close-to-close returns.


Cumulative NQ returns at 5 minute intervals after IBS < 0.2 at 15:00 CT.


Equity curves of a simple RSI(3) strategy on QQQ, with and without IBS filter.

 Update: the comparison chart for the Australian ETF now correctly uses EWA instead of EWO (the Austrian ETF).

Comments (20)

  • nastrading says:

    Nice job bro.

  • Leo says:

    Very interesting,
    One question I have: do you calculate the indicator using the ‘close of the day’ and then assume you can use this ‘close’ as the price you get to open the trade? because that is not realistic, in some exchanges you have to send an order 15/20 minutes before the close if you want to participate in the closing auction. One comment is that transaction costs will probably kill most of the returns of any daily strategy, even with very good commissions you will pay at least 10%pa.
    Not to say the behavior is not interesting, just saying that to make it a real strategy will take some work.

    • qusma says:

      Indeed it is not completely realistic…there are 3 solutions:
      1) Trade right before the close.
      2) Trade right after the close.
      3) Trade in the closing auction using LOC orders.

      Option 1 risks that the price will change a lot between your trade and the close, which is a minimal risk. However you also pay the spread.
      Option 2 risks that price moves away from the closing price (against you) before you can place your order, and again you’re either paying the spread or risk not getting filled.
      Option 3 risks that the range of the day will change between your order and the close, thus making your limit price “incorrect”.

      While these are certainly legitimate concerns, I don’t think they are large enough to be a significant obstacle in trading using the IBS effect. If the range changes and your LOC order ends up getting “incorrectly” filled you can always exit instantly for the relatively low price of the spread + commissions, and such a scenario is going to be very rare anyway.

      In general of course I would not recommend you trade based on IBS only, but in combination with some other strategy such as in the RSI example. The QQQ strategy with the RSI filter makes approximately 20 trades per year, which I think is very reasonable.

  • evo34 says:

    Awesome paper. I wish all trading papers were written like yours. The obvious main concern is that the effect appears to have stopped as of 2012. Curious if it has picked up at all in 2013?

    • qusma says:


      I’m planning to update it with fresher data at some point…I think 2012 was just a temporary deviation, the effect is still around in 2013. Not as strong as in 2007-2009, but it’s definitely there.

      If I extended table #6 to include 2013 data, the average return for the year would be 7.2% thus far.

  • Don M says:

    Do you exit the trade after 1 day? Is the IBS used a 1-day lenght?

  • Rick says:

    What are your assumptions for Table 6 in terms of starting capital, commissions and number of shares traded? Do you invest the full equity on each trade? Well written paper.

    • qusma says:

      Ah, I should’ve been a bit clearer there. The results are fully compounded (so in effect assuming 100% of equity used in each trade), without commissions. Trades are held for one day. Obviously it’s a highly unrealistic scenario, not meant as an illustration of a tradable strategy but simply of the size and consistency of the IBS effect.

      • Rick says:

        Thanks. The effect seems to have died after 2009. Most of the gains in SPY for example were in 2008. Still, I cannot reproduce your results exactly and I think maybe for table 6 at least you may want to list the exact rules, entry and exit points and other assumptions. People will find it hard to reproduce your results. Otherwise, the study is very interesting.

  • Peter Wang says:

    one possible explain for this effect is that leveraged ETFs need to rebalance largely during volatile trading days, especially after 2:30pm.

    • qusma says:

      That is an interesting idea, and it certainly fits the facts vis-a-vis the IBS effect and volatility/range (also the country differences in the effect of volume maybe).

      Leveraged ETFs of course always have to rebalance in the direction of the market, essentially “buying high”. This could definitely exacerbate intraday movements.

      There are, however, two issues that make it impossible for leveraged ETFs to be the sole (or even main) cause of the IBS effect:
      1. The effect existed before leveraged ETFs.
      2. The leveraged ETFs aren’t large enough to push the market around that much. The biggest one, SSO, has less than 1.5 billion in AUM.

      • Peter Wang says:

        Hi qusma,

        Thank you for letting me know that this effect has been existed before leveraged ETFs. And I do agree there are many other important factors contribute to the IBS effect.

        However, I would like to point out that even in 2011, the leveraged ETFs represented only 3.2% of ETF asset under management, they made up 13.3% of ETF trading volume, and the total exchange trade products account for 40 percent U.S. trading volume. The data comes from a paper I have been reading recently, Intraday Share Price Volatility and Leveraged ETF rebalancing by Haryanto, Rodier, Shum and Hejazi.
        Just in case you want to read it, I put the link here.

        Btw, I am a new comer to your blog, but I have already found it very great!

        Peter Wang

        • qusma says:

          That’s a really interesting paper, the front-running strategy seems good…it seems like it’d be a self-reinforcing effect as well (the front-runners would cause even larger trades by the leveraged funds), which I guess would only end after the funds finish rebalancing (thus the end of the day)…The whole thing fits together nicely.

          According to the authors, and If we look at the equity curves it’s pretty clear the the rebalancing thing is an issue during higher volatility times…my guess is that the IBS effect exists independently, but the rebalancing of the leveraged funds magnifies it, explaining the gigantic size of the IBS effect in 2008 (Table 6 in my paper) relative to other years and its positive relation to volatility.

  • justin long says:

    I love the blog and the paper. I was wondering if you backtested the filtered strategy from Table 16 to the short side as well (e.g. go short at the close if RSI(3)>90, maintain if RSI(3)>60, filtered with IBS >0.5). The rest of the paper seems to take trades to both the long and short sides, but this section doesn’t and i was just wondering why. Thanks and keep up the good work!

    • qusma says:

      Hi Justin,

      I appreciate the comments! RSI is a bit…”murkier” on the short side, but I’ll add that data in the next version of the paper.

  • 2013: Lessons Learned and Revisiting Some Studies says:

    […] The original IBS post. Read the paper instead. […]

  • mohammadpouya says:

    It is excellent. I saw a good result in this post. لامپ کم مصرفکرکره برقی

Leave a Reply

Your email address will not be published. Required fields are marked *