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Frequently Asked Questions

Dr K VIX Volatility Model
Please further explain the profit taking rule on BUY signals

The VVM focuses on protecting one's downside since the upside often more than takes care of itself especially during periods of heightened volatility.

Since the late August beta launch, the model has had several 13% to 18% or greater gains within 1-2 days on buy signals, but often, such gains would reverse as volatility tends to swing widely during such times. 

This led to the UVXY profit taking rules should profits exceed a certain threshold. This acts as a trigger to let profits run but stops are kept very tight. The threshold is contextual to market conditions but seeks at least a 12% to 18% profit. The numerous boldfaced entries in the results table show when the profit taking rules were activated.

The results table now reflects the following integrations into the model:

1) The UVXY profit taking rules

2) No override of the model's signals. While there were two signals I overrode that were highly profitable as I wrote in an earlier report, I also overrode a number of signals which were only mildly profitable and unprofitable. The challenge is it is impossible to know ahead of time which signals will be unprofitable and which will be hugely profitable, so it is best to take all signals.

3) No override of fail-safes. Note, as we have stated, the model is self-learning so adjustments have been and will continue to be made along the way. One such adjustment was removal of some fail-safes with new fail-safes starting with the sell signal on 4-3-17. This adjustment showed that over the 8+ year backtests, reward was increased while overall risk was reduced. The downside is larger potential losses for a single signal. Note, the loss of -26.82% for the 4-18-17 buy signal was due to a black swan type of gap down which fail-safes cannot guard against. Same as the -18.4% loss due to the Brexit event in June 2016. That said, UVXY is highly volatile so in very rare cases, it can lose more than -20% even without a gap down though losses should be contained to -12% or less. For XIV used in sell signals, losses should be contained to -6% or less but can exceed more than -10%. Please read the update here.

4) Integration of the VIX Spiking strategy.

Published: Jun 15 2016, Modified: May 3 2017