And now for something completely different. . . . . .
One thing that's caught my attention for a while is the daily % change in the VIX relative to the major indices, including the Dow, SPX and NDX.
I've noticed a tendency for exaggerated VIX moves to foreshadow subsequent short term trends in the indices and here's a simple little study to validate my intuition.
I choose to make the indices the target of the trade rather than the VIX since, by it's very nature, there's considerably more daily noise in the VIX than in the underlying indices.
That format almost makes it easy to test alternate indices performance relative to the VIX.
Simply put, the system sells the SPY if the daily % change in the SPY is greater than the daily % change in the VIX, and then exits the position after a fixed period. Vice versa for the sell side.
A 65% percent profitable return may not seem very impressive, but this is a very simple system and easily improved by adding entry filters such as a % change threshold, an MA trend, etc., as well as exits conditions, trailing stops, etc.
Those improvements could also improve the drawdown and consecutive winners/losers ratio. . . 2 of the most important metrics that I consider when evaluating a system.
And, as always, keep in mind that these studies are not meant to be canned solutions but rather jumping off points for your further exploration. That's one of the reasons they're free. The equity curve really begins to take off around trade # 20, which was initiated on 12/27/07 which is reflective of the beginning of the bear paradigm. Were we to rerun the data backtest with this as out start date, the results would be improved considerably without any further code modications.
Below is the TS 2000i code with the fixed bar exits optimized for the SPY. In future posts I'll look at some of the other indices, add a few filters and some other tweaks. So far this simple approach looks very encouraging for both capturing short term gains and creating a probability model for short term direction.