Fear factor

[probtrader]

I backtested a simple system that buys the SPX when the VIX closes 3 std. deviations above its 100 periods average and closes the position when the VIX is 1 std. deviation below its 100 SMA.

Rules:
- If the VIX closes 3 stddev above the 100 SMA, buy SPX the next day at the open.

- If the VIX closes 1 stddev below the 100 SMA, close any open position.

From 1/1/1991 to 8/1/2007 there were 25 such signals and only 4 negative
trades for an average return per trade of 2.25%:

[probtrader]

[nodoodahs]

http://adamsoptions.blogspot.com/2007/08/and-another-explanation-actual-one.html
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[nodoodahs]

As of 8/31/2001, the market had fallen 4.3% in a week and almost 7% for the month. I would think the VIX would be rising in a fall like that. The market fell another 4.3% into the 7th of Sept.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[probtrader]

I meant, there were 25 signals in the last 18 years. How do you explain the rise in implied vol 2 days before 9/11? Just a coincidence?

[nodoodahs]

Not really. I don't watch VIX in relation to its own stdev or ma. I do watch VIX in relation to the 45-day average true range of the SPX, and that seems to be a good longer-term fear/complacency gauge.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[probtrader]

Thanks. Any thought on that VIX 3 stddev rise on 9/9?

[nodoodahs]

I have generally seen set/trigger used in two instances, one being short-term countertrend trades and the other being trendfollowing trades where whipsaws are common. There's a wealth of information on system design here
http://tradingblox.com/forum/index.php
and in books like “Trading For A Living” by Alexander Elder, “Trade Your Way To Financial Freedom” by Van K. Tharp, and “Trend Following” by Michael W. Covel, just to name a few. If you go to the Amazon page for any of these books, there are other books listed as suggestions as well.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[probtrader]

[probtrader]

Interesting. First, I just noticed that the 4 negative trades all happened during the May-Sep period:

[probtrader]

[nodoodahs]

Often these systems have a "set" and "trigger" to prevent drawdowns.

Hypothetically:

Set when it crosses X standard deviations going up;

Trigger when it crosses back below X standard deviations going down.

Might try seeing if different values of X make it better, or if the Set and Trigger might be different values ...
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[rffrydr]

Max drawdown, July '06...humm.

I don't know: intuitively it seems once you break 2 STDs it goes to 4. Maybe not VIX but definitely with the swings in the Bollinger Bands.

How many 4 STDs are there if any in this period?
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Today is the Tomorrow you worried about Yesterday!