Tuesday, March 09, 2010

VXX Tracking the VIX

This is a followup to yesterday's argument for using the VXX to track the VIX. First of all, a couple caveats: the inverse of this study doesn't deliver comparable results. That is, the VXX works well to forecast the VIX but the VIX doesn't work nearly as well to track the VXX. . . at least for the purposes of this study, which uses my Project Z algorithm to determine pressure points which translate into entry and exit signals. This development is somewhat frustrating since my ultimate goal was the refinement of a Project Z settings that could be used to forecast the VXX, which trades like a stock as opposed to the VIX, which can only be traded via options, which are subject to their own decay and volatility issues.
This brings up caveat #2. The performance results of this study should only be considered in reference to the number of successful/winning trades. Since the VIX is a statistic and not a tradeable entity, there's a few monkey wrenches that have to sorted out here. The dynamics and pitfalls of entering these signals as VIX options trades are well beyond the scope of this post and each trader has to assess his/her risk exposure comfort level which, in turn, will determine how these signals are translated into trades.
Side note: the yellow dots along the price chart are pivot high/pivot low signals generated by the TS default PH/PL algorithm set to 4/2. I use the signals as a second set of eyes to confirm entries and guard exits.
I view this current study essentially as a jumping off point for further research but it's encouraging to find this initial foray into VIX/VXX alignment so consistent.

2 comments:

kelvin said...

I think I looked at all of your post but I still can't quite find out what the VIXEN GE trade is all about. I see bit and pieces referring to it but which post actually tells us the setup ?

bzbtrader said...

kelvin,
One way to find the GE/Vixen posts is to just type GE Vixen into the blog search box on the upper left corner of the blog.
The setup is actually very simple. It's based on 2 minute bars on the GE with a VIX overlay. I use a VXX overlay on the blog right panel FSC vignette because FSC doesn't offer VIX on 2 minute bars. Here are a few of the more detailed posts on the GE VIXEN. The trick is in the execution, which must follow the crosses quickly as the crosses "float" as time passes.
http://bzbtrader.blogspot.com/2009/11/ge-vixen-gadget.html
http://bzbtrader.blogspot.com/2009/11/schwab-vixen-nyad-setup.html
http://bzbtrader.blogspot.com/2009/11/more-on-nyad-vixen.html
http://bzbtrader.blogspot.com/2009/12/moving-vixen.html
http://bzbtrader.blogspot.com/2010/01/ge-vixen-hits-jackpot.html