78 lines
3.4 KiB
Markdown
78 lines
3.4 KiB
Markdown
# Vol Panics
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This strategy was taken from chapter 5 of [*Buy the Fear, Sell the Greed*](https://moshferatu.dev/moshferatu/buy-the-fear-sell-the-greed) (2018) by Larry Connors.
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## Rules
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1. When VXX is trading above its 5-period moving average and its 4-period RSI is > 70, enter a short trade.
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2. (Optional Aggressive Entry) If VXX closes higher than the initial entry price at any point during the trade, enter a second short trade.
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3. Exit the trade if VXX closes under its 5-period moving average.
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### 2-3-5 Scale-In Version
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This version of the strategy enters up to 3 trades:
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1. The initial entry according to the original rules but with 20% of the total position size.
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2. An entry with 30% of the total position size if VXX closes higher than the initial entry price at any point during the trade.
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3. A final entry with 50% of the total position size if VXX closes higher than the second entry price at any point during the trade.
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The exit condition remains the same as in the original version of the strategy.
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### 1-2-3-4 Scale-In Version
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This version of the strategy enters up to 4 trades:
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1. The initial entry according to the original rules but with 10% of the total position size.
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2. An entry with 20% of the total position size if VXX closes higher than the initial entry price at any point during the trade.
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3. Another entry with 30% of the total position size if VXX closes higher than the second entry price at any point during the trade.
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4. Finally, an entry with 40% of the total position size if VXX closes higher than the third entry price at any point during the trade.
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The exit condition remains the same as in the original version of the strategy.
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## Parameters
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**Moving Average Period**: The period used in the simple moving average calculation. (Default: 5)
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**RSI Period**: The period used in the RSI calculation. (Default: 4)
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**RSI Smoothing**: The smoothing used in the RSI calculation. (Default: 1)
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**Entry Threshold**: The RSI value above which to enter the short trade. (Default: 70)
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**Enable Aggressive Entries**: Whether to enter an additional aggressive trade if conditions are met. (Default: true)
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For the 2-3-5 and 1-2-3-4 scale-in versions of the strategy, the **Enable Aggressive Entries** parameter is replaced by the following parameter:
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**Total Position Size**: The total size of the position (in dollars) to be divided amongst the entries. (Default: 1000)
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## Backtest Results
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### /VX
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Note that these backtests were performed on /VX (VIX futures) rather than on the VXX ETF.
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This is because the data feed I am using had very limited data available for VXX.
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#### Original Strategy
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#### 2-3-5 Scale-In
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#### 1-2-3-4 Scale-In
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Hopefully these results demonstrate why you must be extremely careful when shorting volatility.
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A better way to trade this, which the book mentions, is by buying deep in-the-money puts instead.
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