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Advice on reducing drawdown

Hey folks,

I've made a very simple algorithm that shorts the VXX only. The rules of the algorithm are as follows

  • If current price is 1% over the 10 day moving average then short it.
  • Once the current price is 1% over my cost basis then I close positon.

What I need to fix in this is the closing and opening algorithm. I noticed that the algo does terribly if there is a huge spike in volatility. Ideally I'm looking to adjust the entry rules where I wouldn't enter under extreme volatility as it appears thats where the majority of the drawdowns occur.

I appreciate all constructive feedback. This is my first algo on this forum.


Clone Algorithm
Backtest from to with initial capital
Total Returns
Max Drawdown
Benchmark Returns
Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month
# Backtest ID: 591146e0cd0324656d39a63b
There was a runtime error.
2 responses

I suspect there may be a flaw in your logic here. There is no proper entry, exit, re-entry mechanism.

f current_price > (1.01 * average_price):  

OK so far: you enter.
But then:

lif current_price > (costBasis * 1.01)  

This can happen in a nano-second with an instrument of this volatility.
What happens next? The stock continues up and you simply re-enter the next day. Perhaps at a higher price.

Perhaps that is what was intended. And of course if the stock goes sharply down after your exit or overnight, well great.

But....perhaps you should think about the profit target bit. Is that what you really mean to happen? In a rising market do you want to keep enering and exiting?

No real comment from me. Just a query

It looks like you've developed an evil negative skew system. A negative skew system is one that frequently wins (lots of small wins), but when it loses it loses big. And you're asking for guidance on how to make it "not lose big" when it loses.

Have you ever considered that the two go hand-in-hand? The reason why you're able to collect all of those small wins is because you're willing to bear the risk of eating those huge losses from time to time? And if you were to implement rules that eliminate the huge losses from your results, it might also alter (or even eliminate) all of those small wins in the process?

I hate to say it, but there is no free lunch when it comes to this stuff. I wish I had the "magic bullet" for you, but I don't.

Consider why the strategy should work in the first place. What is the economic justification for it to work? What risk premiums is it capturing? And then consider if trying to eliminate the "big losses" would be violating the underlying basis for the strategy in the first place.