Three Charts, an Idea and a Trading System, 04/20/08

S&P and VIX, Chart 1

S&P and Estimated Drift, Chart 2

VIX and Estimated Drift, Chart 3

An Idea:
What happens if you buy when Estimated Drift crosses VIX and then exit at an n day high?

A Trading System:
To test this system, I scaled VIX and Estimated Drift from 0 to 1 and then asked what happened after the scaled price series crossed.

if (lastVIX > lastDrift and currVIX < currDrift) then
buy this bar on close;

and sell when close > highest close of the last 200 days
Results (1991-4/18/2008):
18/18, 100%, avg 16.5 pts, sd 17.0 pts, z 4.1

(see Introduction to Testing Trading Systems for more on interpreting these results)
Looking at the charts, an interesting question is, what happens when VIX crossed Estimated Drift going in the other direction (it looks like a bottom)?

Results for reversed system (1991-4/18/2008):
17/17, 100%, avg 24.5 pts, sd 22.0, z 4.6
Either system serves as a general 'all clear' for trading from the long side after a large spike in volatility, can be used to re-activate other systems or as a stand-alone system.

Henry Carstens
Vertical Solutions