CVR3 VIX Market Timing Strategy Test Results

This series of short articles was inspired by a client of mine who wanted to see the historical performance of a variety of trading strategy ideas which he had read about on other educational trading websites.

To begin with, I searched Google for the term “trading strategies” and wanted to test any quantitative trading strategy ideas that could be learned in articles which ranked on Google’s first page.

One of the highest ranked sites if searching for “trading strategies” was stockcharts.com, and so for today’s post I’ll be testing the CVR3 VIX Market Timing Strategy explained in this article.

As per the images within the article, I will be testing the strategy on the SPY ETF since inception.

Please also note that $0.01 per share transaction costs will be simulated ($2 minimum per trade).

Entries and Exits made on following days open.

CVR3 Trading Strategy Long Signal

The CVR3 trading strategy has 3 rules for a long signal. These are:

  1. The daily low of the VIX is above the 10-day moving average.
  2. The daily close of the VIX is at least 10% above the 10-day moving average.
  3. The VIX close is below the VIX open.

When all 3 of the above rules are met, go long the SPY etf on the next days open.

For example, the following chart plots a blue candle whenever the 3 long signals are valid:

 

CVR3 Trading Strategy Short Signal

The CVR3 trading strategy has 3 rules for a short signal. These are:

  1. The daily high of the VIX is below the 10-day moving average.
  2. The daily close of the VIX is at least 10% below the 10-day moving average.
  3. The VIX close is above the VIX open.

When all 3 of the above rules are met, go short the SPY etf on the next days open.

For example, the following chart plots a black candle whenever the 3 short signals are valid:

 

CVR3 Trading Strategy Exit Signals

  • Open long positions are exited if the VIX moves above the prior 10 day MA.
  • Open short positions are exited if the VIX moves below the prior 10 day MA.

In the original article it is said that exits are made on an intraday basis, but because I am using EOD data the exits must be made on the following open.

This is because without intraday timestamps I am unable to reference the price of SPY at the precise moment when the $VIX cross above or below the 10 day MA.

With that said, the following chart provides a couple of trade examples:

 

The following charts show the statistics, equity curve and monthly breakdown of returns produced by the above strategy during the sample period:

 

Another exit method that is mentioned in the original article is to simply close open positions after two to four days.

The strategy was not improved when testing these timed exits.

Increasing the Number of CVR3 Signals

Because the CVR3 trading strategy signals are relatively rare (on average 7-8 trades per year were produced during the sample period), the original article suggests that a 3 day window can be used to identify each of the 3 entry signals.

That is to say, as long as all 3 entry signals are identified within a 3 day period then we can enter a position.

I tested this strategy during the sample period and the results can be seen below:

 

Applying a Longer-Term Market Direction Filter to the CVR3 Trading Strategy

To test whether or not the CVR3 strategy might be improved if the longer-term direction of the SPY is considered before making a long or short entry I applied a market-timing filter to the strategy.

The market timing filter says that:

  • Long entry signals are only valid if the 100 day % return of the SPY is positive.
  • Short entry signals are only valid if the 100 day % return of the SPY is negative.

The results of the CVR trading strategy (with the above market-timing filter) can be seen below:

 

As the author of the original article stated, the CVR3 trading strategy shouldn’t seen as a stand alone system and the strategy was only provided as a starting point for further system development.

If you’d like me to modify and test any of the entry or exit rules in this article, or if you’d like me to test any other strategy that you’ve read about in another publication then please feel free to leave a comment below.

All the best,

Llewelyn

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