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A Work on System Design-III: Jump VIX Strategy

May 18, 2010

This is the third part of a seven post series, following twice in each week, I will be talking about the art and science of trading system designs.The blog posts will encompass,the logic,the philosophy behind the logic,the code, developments, design and other technicalities of trading systems.Previous parts here: Part -1, Part-2

Usually, I prefer to keep my systems designed in a specific way. That is, I have got specific modus operandi and mandates while designing trading systems based on historical inefficiencies. But this strategy, I am going to talk about is quite different from all the ones you might be coming across, used to seeing or even in terms of traders who will be trading it.

So without much ado,let me surmize:

Name: Jump VIX Strategy
Source: Jump Up! Blog
Trading Style: Countertrend
Psychological Style: Contrarian
Trading Frequency: Very Low
Number of Trades: 9
Backtest Period: Jan 2008-May 2010
Philosophy: Before I elaborate on the strategy, I believe it will be prudent to talk about the underlying philosophy behind the system. And to have a well formed outlook, its important to understand how “one small part of ” the markets work. Consider a market, something like that of present; which is usually how the markets should be. Chaotic, random, predominantly moving sideways, giving people other than “real good” traders a hard time. This strategy believes, that markets are not meant to hand you its money. Which means, there is no ‘easy money’.

Often, when market diverges from this kind of behaviour and rallies heavily, a very broad section of the markets return home satisfied. The retail, the institutions(both due to their long-only bias), the brokers, the hedge funds(because of the psychologically comfortable long only bias) and the general media. This kind of behaviour when constantly rewarded (i.e markets keep rallying), give rise to more such behaviour, finally ending in a trap called, the complacency trap. Nobody is really afraid of anything, news are almost always positive. Nothing really to be afraid of.

Now comes the point, which should contradict any prudent market observer’s takes. Everyone is happy and in general complacent. How can it be? The markets are not made like that…

So he goes short. He goes short when everybody is buying, feeling complacent and almost always in a feel good party.

Trading Rules: Short Index at close, when VIX < 33 period lowest low,
Close position at close when VIX > 22 period highest high

Stop: 1.5 times ATR(15) from Entry Point

And here was the performance:


JUMP VIX PERFORMANCE vis a vis Buy and Hold

The backtest period was 01-01-2008 to 01-05-2010.


There are many notable features in this system.Its a pure short only based system. Quite unnatural by any precedents. Moreover its relies on a foreign ticker to take care of positions in an index, interesting to say the least. But though all such things serve interesting snippets from an analytical position, there is one major glitch in backtesting.

And inspite of me knowing about this shortcoming, I didnt /couldnt clear it. Its, that the backtesting period is unusually low. Hardy 2 years doesnt serve any purpose in such a system. Especially when the trading frequency is so low. But I can’t help it.


The very fact, that VIX was introduced in mid November 2007, which didnt have any OHLC values back then, is the reason I cant backtest before Jan 2008.

Moreover, a close inspection of profit tables show that, in a bear run, it performed handsomely but in a bull run it has managed to etch away some returns. So critics might scream “curve fitting”! but then I dont have a choice. {One possibility was to test this on US data, but I am not sure if the sanctity of the entry rules would be respected or not}

Moreover much of what you are seeing right now, is the result of some clever optimisation, which we will touch upon in the next few episodes.This blog post wanted to show you, how things can move when you approach the markets for exploiting a historical edge.

I am attaching the required AFL. I hope it serves you well: Jump VIX Strategy

[Rename the file from docx to .afl, put the Positions  in Settings of Automatic Analyzer Window as Short and Initial Equity as 100,000]

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