Tuesday, November 30, 2010

Flow

copyright http://www.mattludin.com/

Michael Bigger over at Bigger Capital wrote on his blog about the idea of 'Flowing' while trading. Flow is an interesting and very real concept.  I feel compelled to write a little bit more than the comment I left on his blog below.

"Flow is a state of heightened mental alertness where we are most productive. There is a sense of serenity and calmness about our work. We see tremendous results to our efforts and everything seems to fit into place. Time appears to slow down as our decision-making ability is running at full speed and efficiency. When I am in the flow [going movie reference here], I feel like Neo from the Matrix, when he finally 'gets it' and stops those bullets mid-flight. He's fighting Mr. Anderson in semi-slow motion, always 1 to 2 moves ahead. That is full flow! The hardest part about achieving flow is replicating that feeling on a consistent basis. Mr. Bigger had touched on what we need to do to reach consistent flow in many of his blog posts. I believe consistent flow can be achieved through constant practice and attention. But not just regular practice, deep practice as described in Daniel Coyle's book The Talent Code. We all have the talent, but it must be cultivated through deep practice. Thanks for your insights Michael, now time to create some flow."

Flow is energy. Flow is rhythm. Good rhythm breeds positive results. Being in tune with one's self and his/her personal ambitions generates the proper environment to create wonderful flow. Flow can be applied to everything we do. I work hard to generate flow on the basketball court, working my other job as a CPA, trading stocks, and even playing video games.
Flow is an intangible concept that can lead to tangible results. Achieving flow is difficult in of itself, but I believe maintaining flow is even harder. It is a constant work in progress that cannot be left alone. Flow comes and goes, but why? We must be more self-aware of how we act and re-act to situations. Become mentally (even at a subconscious level) in tune with your environment and create a breeding ground for flow.

Saturday, November 27, 2010

When the VIX is up 20% on the Week, What Happens to the VIX and SPY Next Week?

Thanksgiving week ended with the SPY dropping -1.16% and the VIX shooting up 13.60% on Friday.  For the week, the VIX blasted up 23.17%.




This got me to thinking: what happens to volatility when the VIX makes a weekly gain of 20% or more?


VIX up over 20% on the week,  buy VIX; sell 'n' days later. $10,000 per trade; 1993 to present.
Exit 'n'
Days
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
      (5,839.29)
52
20
38.46
-29.57
-1.12
       750.96
      (651.83)
0.72
1.15
2
    (17,276.06)
52
17
32.69
-30.84
-3.32
       975.01
      (967.18)
0.49
1.01
3
    (20,933.44)
52
15
28.85
-37.68
-4.03
   1,115.65
   (1,018.06)
0.44
1.10
4
    (26,498.81)
51
12
23.53
-37.68
-5.20
   1,466.00
   (1,130.53)
0.40
1.30
5
    (15,578.64)
48
16
33.33
-33.22
-3.25
   1,615.22
   (1,294.44)
0.62
1.25


This tells me that volatility tends to contract over the next 1 - 5 days after the VIX closed the week up 20%. Interesting. Short the VXX?

What about adding this criteria: VIX is up over 10% on the last day of the week.


VIX up over 20% on the week and up 10% on the last day of the week,  buy VIX; sell 'n' days later. $10,000 per trade; 1993 to present.
Exit n
Days
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
    (10,372.16)
21
3
14.29
-29.57
-4.94
   1,076.56
      (755.66)
0.24
1.42
2
    (20,652.54)
21
2
9.52
-30.84
-9.83
       472.54
   (1,136.72)
0.04
0.42
3
    (21,468.34)
21
3
14.29
-37.68
-10.22
       997.84
   (1,358.99)
0.12
0.73
4
    (21,311.03)
21
2
9.52
-37.68
-10.15
   3,424.25
   (1,482.08)
0.24
2.31
5
    (14,663.53)
20
3
15.00
-29.12
-7.33
   3,696.05
   (1,514.80)
0.43
2.44


Less occurances, but further confirmation to the volatility contraction idea.

If I then wanted to apply this to buying the SPY, here are the results.


VIX up over 20% on the week and up 10% on the last day of the week,  buy SPY; sell 'n' days later. $10,000 per trade; 1993 to present.
Exit n
Days
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
         1,902.79
21
18
85.71
-1.68
0.91
       127.93
      (133.29)
5.76
0.96
2
         2,718.48
21
18
85.71
-2.35
1.29
       162.02
         (65.98)
14.73
2.46
3
         2,652.67
21
17
80.95
-2.93
1.26
       188.72
      (138.88)
5.78
1.36
4
         2,547.19
21
15
71.43
-6.16
1.21
       246.34
      (191.31)
3.22
1.29
5
         2,110.83
20
14
70.00
-7.55
1.06
       229.72
      (184.22)
2.91
1.25


Looks like a pretty good chance for a short term pop next week. It hasn't happend very often, but when it does, the odds are on your side. 

Good trading out there my friends.

Footnotes

Profit Factor = Profit of Winners / Loss of Losers
Payoff Ratio = Average Win / Average Loss 
Max Trade % DD = intra-trade drawdon on a closing basis

Tuesday, November 23, 2010

Historically Backtested, High Probability Setups

With all the selling today, it is time to buy the fear. A simple trading system that I follow triggered a few signals for 11/23/10 in some ETF's. It is a rather low risk, high probability scenario. The system is ony made of 3 inputs, one based on price and the other two based on moving averages. The goal is to find an edge but keep these things very SIMPLE. Below are the top ETF's based on # of trades in the sample:


Buy Indicator; Sell Indicator [close to close].  $100,000 per trade; ETF's Inception to present.
Ticker
Net Profit
# Trades
# of Winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
Avg Bars Held
 SPY 
    58,532
63
51
80.95
-4.93
0.93
      1,352
       (869)
6.61
1.56
3.84
 EWH 
    25,499
56
37
66.07
-14.15
0.46
      2,063
   (2,676)
1.50
0.77
5.27
 EWZ 
    74,053
53
42
79.25
-16.23
1.40
      2,538
   (2,957)
3.28
0.86
3.77
 DIA 
    22,780
52
38
73.08
-3.74
0.44
      1,010
   (1,114)
2.46
0.91
4.10
 EWL 
    32,109
44
34
77.27
-10.59
0.73
      1,400
   (1,548)
3.07
0.90
4.11
 EWU 
    46,926
44
36
81.82
-5.45
1.07
      1,404
       (452)
13.97
3.10
4.00
 EWS 
    48,197
43
31
72.09
-8.46
1.12
      2,103
   (1,417)
3.83
1.48
4.07
 EPP 
    29,199
38
31
81.58
-8.31
0.77
      1,183
   (1,068)
4.90
1.11
3.89

Act on these. Add your own stops. Do nothing. Combine with your own strategy. Do whatever you want, I just like sharing my thoughts that I believe people can benefit from.
I use these backtested results to give me the confidence to take certain trades. It is not easy buying $EWU or $EWH on a day like today, or picking up $SPY call options as the market is selling off. We'll see how this plays out; Kim Jong-Il could fire another missile or more debt problems could crop up in the EU. Futures were green when I wrote this, but who knows. I'll be ready to add more tomorrow if additional signals trigger.