Published : June 26 2016 at 14:09 ET

The Trading Laboratory

As you all know, I have said in interviews and in writings that there is no such thing as a black box. A successful model/strategy must stay fluid as the only constant when it comes to markets is change.

Thus, I always have ongoing strategies I first backtest then study in real-time if the backtests show substantial profits with manageable drawdowns. 

One key strategy I have been researching and trading in real-time is ready to be integrated into the VVM, known for easy reference as the VIX Spiking strategy. This strategy focuses on highly volatile periods. When it detects a potential setup for spiking volatility, it has been profitable 61.1% of the time using the VXX/UVXY ETFs since VXX started trading in 2009. Of course, it misses many spikes, but only focuses on the most probable setups. Gains have ranged between 14% and 108% (8/20/15: bought UVXY near the close, 8/24/15: sold UVXY at open). A 14% profit taking rule is built into this strategy which looks to lock in profits once a gain of 14% is achieved but will allow profits to run if certain conditions are met such as on 8/20/15. Meanwhile, the worst drawdown to this particular strategy has been just -9.4%.

Keep in mind that -9.4% is where the trade was closed out. While the trade was live, the intra-trade losses could be as much as -22%. This is a highly volatile strategy so worse drawdowns are always possible.  

While the numbers look impressive, this VIX Spiking strategy is by no means any sort of holy grail but does materially improve profitability in VVM.

Additions to VVM

The huge gap lower on Friday after the Brexit vote after S&P 500 and other markets were approaching new highs delivered a colossal shock to the markets. This is why past results can never guarantee future profits. The market will always find a new way to surprise.

That said, given the number of material additions to VVM since it was launched in beta last August, we will start fresh with everything in place:

1) The 15% UVXY profit taking rule which uses a 7.5% gain in VXX as a trigger to let profits run but keep stops very tight so 15% is preserved. 

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. 

4) Integration of the above VIX Spiking strategy.


The current VVM signal is on SELL but is overridden by integration of this new VIX Spiking strategy explained above which would have gone into effect on Friday had it already been integrated into VVM as volatility spiked in a manner that triggered a switch to a BUY signal on 6/24/16.

Of course, it is too late to act on this signal, as I am just now integrating it into VVM after sufficient testing in real-time that began in late 2015. Friday's surprise shock along with the strategy's profitable buy signal on 6/10/16 made it clear the strategy is ready for VVM, especially given potentially elevated levels of volatility in the days and months ahead. Incidentally, I wrote in the 6/11/16 Weekend Review: " jumps in volatility often lead to a second and/or subsequent days in which volatility is elevated." 

The results shown now represent all of the above rules in place since the model went live on 12/23/15. Note how the model sometimes gets whipsawed multiple times in a day as this is part of how the model strives to keep risk to a minimum. Real-time results start after the current 6/24/16 buy signal is closed out. In the results table, though a number of the trades were live, I've used exact figures for fail-safes thus it is best to call the results up to the close of the 6/24/16 buy signal as backtested.

Again, always remember to position size according to your risk tolerance levels since markets live to surprise and are ever-changing, thus past performance can never guarantee future outcomes. Indeed, our research studies are always ongoing, thus all stock and ETF trading strategies remain fluid as always as the only constant is change. 

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