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Mornings with XIV

This isn't something I would likely trade with real money (25% max DD is too much for my blood), but it was something I was curious about. Basically, I look at VXX and XIV. If they open down, I buy it and if it opens up, I sell it short at market open. 2 minutes after the market opens, I place a stop order for them with a really tight stop. Then 10 minutes after the market opens, I close the position.

One "issue" I haven't sorted out is that the stop order still sits out there after the position is closed out, so if that stop order gets triggered, it actually ends up causing me to hold the opposite trade I held in the morning. I think this "issue" actually helps overall performance. Because of this, I close out positions again a few minutes before the market closes.

Overall results seem really good with the exception of the high drawdown. I tried adding a larger basket of stocks, and it works with some of the more volatile names like the FANG stocks, but doesn't seem to work if you get much past that. Any thoughts on how to make this better? Namely to find a larger universe of stocks or to limit drawdown?

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: 587fe404616f1d5df74fd97a
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5 responses

given the gains, 25% drawdown is pretty good actually.

This algo looks interesting... and has potential. But, the performance is flat to down over the past year.... any thoughts on how to improve that? Also, it seems to under perform during a market downturn, and one is likely this year and while market's are at all time highs, the performance this year is down... thoughts?

Volitility trading has been an outlier for the past 5 years or so. Now that everyone knows about them the big boys have moved in the market has compensated. I don't think you're going to get the same kind of returns going forward that you've gotten since 2011, but the high risk is still there

This algorithm is exceedingly simplistic, and was really more of an outcropping of things I noticed when working on other algorithms. I wouldn't live trade it, and paper trading of it recently hasn't shown anything positive. The most interesting thing I have seen in volatility trading are the algorithms that use the Williams VIX Fix (WVF) as an indicator on whether to buy or sell.

What are the big boys going to do? Drive volatility up by crashing markets? Don't think that will ever happen unless there is a dramatic change in phycology of most buy and hold managers and the whole world of long only to the moon, unless economic factors force volatility on you like Japan, but I don't think anyone is going to purposely ruin the easiest trade of their lives of short or buy inverse volatility.