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Frequently Asked Questions

Dr K VIX Volatility Model
What are the model's drawdowns?

The model's two worst drawdowns since backtesting began on February 2, 2009, are 38.4% in 2016 and 40.9% in 2017. The 38.4% drawdown was unusually large due to a highly volatile market environment which is the where the model can make substantial gains. Indeed, it only took the model 13 trading days to recoup all of its losses, then it went on to achieve another +30.5% gain over the next 25 trading days. 

The 40.9% drawdown was unusually large due to an important adjustment that was made starting with the sell signal on 4-3-17. If you examine the results table, you would think the adjustment caused the worst drawdown. In reality, it was a confluence of events: 1) The VIX had one of its largest down days in the multi-decade history of the instrument, 2) The Trump impeachment issue which caused the -6.5% fail-safe to trigger. Such a fail-safe only triggers in 1 out of 11 signals, thus is rare, and 3) The first VIX Spike Signal in almost a year. Such rare signals have a 55% chance of big profits. This one ended with a loss. 

The four worst drawdowns are detailed here in this important update: http://www.virtueofselfishinvesting.com/reports/view/vix-volatility-model-vvm-important-update-5-16-17 

Up until recently, I had refrained from posting any backtested results as impressive as they are, since greed, a damaging type of investor psychology, tends to entice investors into oversizing their positions as the backtested results bring false confidence to a strategy that can be highly volatile. Make sure you read: http://www.virtueofselfishinvesting.com/faqs/answer/what-are-the-potential-weaknesses-of-the-model 

The most important part of the backtests are the drawdowns, ie, risk, since the upside gains more than take care of the drawdowns over any rolling 3-month period, and typically over most rolling 2-month periods. In other words, as detailed in the important update link above, it usually takes a few weeks to make back the losses even in the worst of cases. 

These instruments can be exceptionally volatile so make sure your position sizing is aligned with your risk tolerance levels. And always remember that prior results are no guarantees of future performance.

Published: Jan 13 2016, Modified: May 23 2017