Tuesday, December 29, 2009

UYM / VXX Pair

If you liked the EEM/VXX pair trade you'll really like the UYM/VXX trade. This is a very robust pair as demonstrated by the similar results for these 2 different timing models. . . one based on a 4 day lookback, the other based on a 9 day lookback.
The 4N model results are the product of simple condition 1 signals while the 9N model results are the product of both condition 1 and 2 signals.
Both models get to the same place eventually, you just buy a lot more risk exposure with the 9N model. As a partial tradeoff for reduced risk exposure the 4N model does incur additional commission expenses (Schwab traders get a break when using SCHF in lieu of EEM) but that's a small price to pay (IMHO) for the added safety of a shorter term hold period.

Interestingly, the topography of both models shows the same attractive ski jump pattern with a gradual decline in performance from optimized N day values. What we don't want to see is a pattern that looks like Niagara Falls since that will indicate that the results are probably over-optimized, unique to a very narrow range of parameters, and cannot be sustained.
This is another reason to review performance potential of a pair by checking the slope of the equity curve (chart D above) to confirm there are no major hiccups along the path.

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