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Frequently Asked Questions

Dr K VIX Volatility Model
The model has outperformed the results table as of this writing on 4/2/16 had the profit taking rules been in place and had operator error of overriding two signals not occurred. Please comment further.

A: The various emails sent out in in the first quarter of 2016 on profit taking with respect to the VIX Volatility Model (VVM) serve to underscore the importance of taking profits when you have them. A number of members have often let greed take over when the VVM has had very quick profits exceeding 12% to 18%, only to see such profits vanish. But this is a natural tendency which plagues even the most experienced investors. Thus the emails are designed to underscore the importance of profit taking especially in this market environment. But rather than letting each member decide for themselves whether to take fast but substantial profits, the profit taking rules on BUY signals further improved profits by a significant degree in the comprehensive tests conducted. Note, SELL signals do not have profit taking rules, so it is up to each member to decide if and when they with to take partial profits.

The operator override has been explained as it is illustrative of how many years of success can work against one as a trader: https://www.virtueofselfishinvesting.com/reports/view/market-lab-report-how-experience-can-work-against-you 

All that said, actual profits are all that matter, and "would have/could have/should have" are meaningless. As stated in the emails, those who took profits when the model was up +12% or beyond have done well. And those who overrode some of the model's signals will naturally have varying results.

Note, the results now reflect the following backtested changes:

1) The UVXY profit taking rules activate 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.

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: Apr 1 2016, Modified: May 3 2017