[jswanson]

Here is a simple automated system that might spark some ideas on creating a complete trading system of your own.

It's called the VIX Stretch Strategy and was found in a book called “Short Term Trading Strategies That Work” by Larry Connors and Ceasar Alvarez. The concept is executed on a daily chart of the S&P E-mini futures market and the rules are very simple.

1) Price must be above its 200-day moving average
2) VIX must be stretched 5% or more above its 10-day moving average for 3 or more days
3) Exit when 2-period RSI crosses over 65
Simple yes, but also powerful.

A 200-day simple moving average (SMA) acts as a simple market environment filter by dividing the market into two major mode: bullish and bearish. Since the strategy only goes long, trades are initiated if the closing price is above the 200-day SMA filter.

The next rule utilizes the VIX which is a measure of the implied volatility of the S&P 500 index options. This is sometimes called the fear index. Why? You will see this index climb dramatically when the market sharply falls and market participants become fearful. Thus, spikes in the VIX index are often associated with steep or dramatic market selling. Since we are looking for a market downturn to open a long trade when we are within a longer term bullish trend, we use the VIX index to gauge the market downturn. Buying the dips within an overall bull market is a classic trading setup. It’s also interesting to note we are not simply using price action to gauge a market downturn. By using VIX to gauge the level of the market downturn we are measuring the increasing volatility seen in the S&P 500 index option prices. Thus we are not measuring a pullback in price directly, but indirectly.

The final rule is our exit rule which uses a 2-period RSI. Upon the close of the daily bar the RSI is calculated and if this value is above 65 we exit at the close. I coded these rules in EasyLanguage to see how well they would perform. It did rather well. The results below are from 1997 through March 2011 (which was the last time I ran the results). $20 for slippage and commissions was deducted per round trip.





The code I used to generate the results is available here as an easy language text file.Is this a complete trading system? Nope. Please note the code used to generate these results has no stops! Most people would consider this a complete violation of the rules. I myself would not trade without stops. So a catastrophic hard stop may be added. The code has a input field to enter a stop. In closing this timing strategy is a great seed idea for building a complete trading system. With a little creativity I’m sure you could turn this into a great system.

[zdo]

Thanks. Your contribution reminded me of

Research Synthesis: The VIX as a Moderator of Small vs Large Cap Performance and the “Generals Lead the Troops” « CSS Analytics

"… one thing that experienced researchers understand both consciously and intuitively is that combining uncorrelated variables/indicators leads to superior results that are also more robust” David Varadi


All the best,

zdo