Thank you for your comments on my system. There are a couple things I'd like to point out:
It's funny how some people get credit from the work of others. The RSI was developed by J. Welles Wilder. Setting the period to 2 and calling this a new development sounds extremely weird. it's like setting the moving average period to 2 and claiming it your invention. It is so disconcerting that people in this industry do not have respect for intellectual property. At least Quantopian does a good job to offer credit to original work.
I did not say that Cesar Alvarez developed the RSI. Everyone and their grandma in the quant community knows the RSI has been around for decades and was originally created by the legendary J. Welles Wilder. It was the particular technique of using a 2-period setting for the RSI that was popularized during the early 2000s by Cesar Alvarez, another quant legend who is also a good friend that lives near me. Notice that he did not rename it to the Alvarez RSI because he didn't change anything fundamental to the RSI's formula. Now on a different note, Cesar did help create another variation of the RSI called the "Connors RSI" while he was working under Larry Connors (yet another quant legend), but I digress.
Now, a system with 26% max drawdown , leverage and NO stops is the ultimate NO NO. You have more chances going to a casino and betting all your money on a single roulette number. This system is NOT market neutral, repeat, not market neutral. If long SPY and there is flash crash but not long TLT, you can end up owing the broker multiples of your net worth.
I did not claim this system was market neutral, nor did I recommend its use to anyone. I simply presented an interesting mean-reversion strategy that is extremely simple at its core to demonstrate the concept of using the RSI2 to generate trade signals. Obviously, if you wanted to trade this, you would need to add risk management techniques like hedging, using stop loss and/or scaling into positions, etc.
As for your Black Swan comments, please realize that:
1) I implied leverage was optional, not required. I even stated that the non-leveraged version would not outperform SPY. If you wanted to undertake the risk of using leverage to increase return then that's your call but that option is there. I wanted to show that even the 2x leveraged version has hypothetically outperformed SPY in the last 15 years while maintaining a similar level of volatility and even a smaller Max DD during 2008.
2) This system's base allocation to SPY is only 50%, so even at 2x leverage, your exposure to SPY is the same as if you were going to buy and hold the ETF with 100% of your account. If a Black Swan happens then the SPY portion is only going to suffer just as much as the ETF itself. Not to mention that there could also be an open TLT position at the same time that could potentially hedge the Black Swan (unless all correlation goes to 1 which means pretty much everyone is screwed anyway). I won't deny this simple system's vulnerability to a Black Swan event because if both SPY and TLT tank at the same time then yes, you could get wiped out, but so would many others in that kind of an event. That is why you diversify little bits of your money across many different systems/strategies to spread out your risk.
3) Unlike an SPY/TLT buy-and-hold strategy, this system is not in the market 100% of the times. In fact, if i recall correctly, it is exposed to either asset only about 50% of the time (gotta double check my numbers). So just statistically speaking, it automatically has half the odds of getting struck by a Black Swan.
If you have any ideas or improvements to add to this strategy to make it less risky then please feel free and contribute.