Market Lab Report - Volatility Model Update

Published : November 14 2015 at 8:32 ET

MDM is designed to catch longer term moves rather than every short-term move. On the other hand, the Volatility Model is designed to catch shorter term moves. It has caught enough moves in extensive back tests and in real-time to put reward way ahead of risk, thus profits have outperformed all other strategies even in a sideways sloppy market as we have seen for much of this year. The success of the results put the model in beta phase on the website. Of course, always remember that past success is no guarantee of future success.

The volatility model went to a buy signal on Nov 12 because the risk level was about -2.5% and the potential upside was much larger. Nov 12 marked the seventh day of its pullback, so there was a fair chance the market would find its low and bounce as it has done many times in similar situations this year. Plus the S&P 500 was looking to get support around its 200dma. But selling persisted on Nov 12 as the S&P 500 stayed under its 200dma, so the model went back to cash as its fail-safe was hit for a -2.6% loss using a 1x ETF such as XIV.

But then, shortly before the Nov 12 close, the volatility model issued a rare sell signal, but since it is in beta, I decided not to issue another signal when the model had gone to cash just a couple hours prior. The sell signal was a rare, higher risk signal as such a sell signal comes along only 1-3 times a year based on back tests, but carries potentially very high reward. But since this signal was out of the model's norm, and given that the model had just gone to cash, I decided to keep the model in cash.

That said, I'm figuring out how best to provide risk/reward for members that will be conducive to most trading psychologies. But that is a difficult task, so I'm thinking of just issuing ALL signals and let members deal with the sometimes large number of whipsaws as the results in backtests and in real-time overall seem to speak for themselves even with all the whipsaws designed to protect the downside. That said, the issue I sometimes have is taking my own signals, always to my detriment, especially if I've been whipsawed.

But mistakes are learning opportunities for refinement so I think that will be the best course of action. And as signals are issued, members can see for themselves how all signals should be taken as it is nearly impossible to predict which signals are whipsaws at small losses while other signals have resulted in substantially larger gains.

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