VIX Short-Term Counter-Trend Cycle and Basic Strategy

By Lawrence

This indicator / trading strategy has multiple usages. It is based on the VIX index using only data from regular trading hours. The basic mechanical system is an always in the market strategy based on daily timeframe.

Real-Time Trading Assistance

Real-time update of the indicator is provided under the name “VIX STCT Cycle” every 5 minutes during regular trading hours.

End-of-Day Report

The same information provided in Real-Time Trading Assistance will also be made available in the End of Day Swing Models report for all members (including free member). *** ready soon ***

Purpose

VIX Short-Term Counter-Trend Cycle is a contrarian indicator that identifies the potential end of the current trend based on VIX readings.

It switches to “Looking for Swing Top” (“Sw Top” in Real-Time Trading Assistance) when the chance of forming a swing top increases. When VIX is trending, this tells you to ride the wave higher on daily basis. When VIX is not trending or hitting an important support, it is time to look for short opportunities.

It switches to “Looking for Swing Low” (”Sw Bot” in Real-Time Trading Assistance) when the chance of forming a swing bottom increases. When VIX is trending, this tells you to ride the wave lower on daily basis. When VIX is not trending or hitting an important resistance, it is time to look for long opportunities.

The number of days since the indicator switching to the current mode is also reported. The number of days since the switch is an important piece of information as trends do grow old and the chance of flipping direction would increase significantly after 10 days or so.

VIX Short Term Counter-Trend Basic Strategy

Applying the indicator mechanically, after the day the indicator switching direction, simply:

  • go long on next open if switching to “looking for swing low”
  • go short on next open if switching to “looking for swing top”

Features

  • robust performance over 21 years
  • low frequency – trades only once every 1 to 2 weeks
  • easy to manage – if there is a signal by the end of the day, enter next morning at market
  • only losing money in year 2004, 2013 and 2014 at reasonable amount

Performance Summary

Historical backtesting results below. 1-tick slippage and $5 round turn commission accounted for in the testing. Results are based on data from April 1997 to June 2018.

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Equity Curve

Following is the equity curve of the strategy over the complete backtesting period.

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Historical Trades

Can be downloaded here if you are a member. *** ready soon ***

Full Trading Strategy Disclosure

Full disclosure of the counter-trend cycle indicator and trading rules for the Basic strategy will be provided in upcoming Emini trading manual.

Auto Trading

This strategy will not be part of the auto trading service.

Notes

The VIX Short-Term Counter-Trend Basic strategy is just an illustration of the robustness of the Cycle indicator.

Detail explanation of the VIX Short-Term Counter-Trend Cycle concept and full disclosure of the more advanced Standard strategy (also based on the same indicator) will be available as part of the upcoming Emini trading manual.

The VIX Short-Term Counter-Trend Cycle indicator officially replaces the VSnap strategy in the Real-Time Trading Assistance since the Short-Term Counter-Trend indicator is the foundation to the various VIX based trading strategies featured in this site. Having this one indicator there will serve multiple purposes down the road.

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