I tried to implement the strategy can adjust the number of shares held on each trading day based on the recent historic price volatility of the share, with the aim of capping the strategies volatility at some defined level. (courtesy of Tim Meggs) The idea is, #.of shares held across trading day = min(100% , volCap / priceVol) * initialShares, where:
volCap = the required target volatility cap level (user defined)
priceVol = the price volatility (annualized from stddev)
initialShares = the initial # of shares purchased (used as a base)
I then tried it on one of the most volatile stocks, TPX, during the third quarter of 2011 when it's most volatile. The results show a minimized loss.
However, I also tried to implement it during the "good times". This strategy can have a much lower return than the benchmark. It seems that it can only be used during the times of turbulence. Any thoughts on that?