The Lawrence Chan Blog

I am going to present a different kind of swing trading strategy this time using the CBOE Volatility Index VIX to trade S&P 500 ETF (SPY) and Dow 30 ETF (DIA).

CBOE VIX is a measure of the implied volatility of the index options on the S&P 500 cash index. Traders give it the nickname "fear index" as it shows the traders’ expectation of volatility in the stock market over the next 20 to 30 days time span. The special characteristics of VIX make it a perfect candidate for the construction of breadth based trading models.

The Performance

Following chart shows the approximate net points gained on SPY since 1996.

Notable characteristics of the model:

1. Impressive overall performance

2. It does not produce much profit when VIX is locked in tight range

3. No significant drawdown from #2 implies driving bias is very strong

4. Performs well in both long and short trades

5. Average duration per trade is about 6 trading days

6. Combined win rate stands at around 66%

7. Stable win rate across many years

8. As good as price based models

9. Works equally well on DIA due to the high correlation between SPY and DIA.

10. To control risk from news shock, a 2.5% stop can be employed. The performance on the model with stop is about the same as the raw model as the 2.5% stop is rarely triggered.

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In the news, Rochdale Said to Be in Rescue Talks After Apple Trades Sour.

Rochdale claimed than due to unauthorized trades made by a rogue trader has caused major stress on the company’s financial position and that it is looking for investors to rescue the firm.

Regarding the situation, we know that

a. Apple earning was reported back on Oct 25th

b. Apple swinged down to right above 590 and back up to 610 on Oct 26th

c. Apple then gapped down to below 590 on Oct 31st and bounced back up to above 600 briefly before another wave dropping Apple straight down to 575 on Nov 1st

My questions,

1. Why is there no firm-wide real-time warning on sudden increase in margin usage? Their trading portfolio is supposed to be quite small so it makes no sense that such margin usage increase is not detected immediately.

2. Why is there no authority limitation on the trader? A mid-sized hedge fund or even a small prop firm has authority limits on traders.

3. When did the people at the top find out about the trade? It is total nonsense that the firm is still holding the position if the people at the top found out about the situation before the bounce in Apple happened on Oct 26th.

Logical conclusion is that the firm chose to hold onto the Apple position as of Oct 26th close even if the trade is really as claimed that it was unauthorized, if its people in charge already found out about the trade that day.

I guess we will never be able to find out what happened exactly, just like all the other famous Wall Street trades that went bad.

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Over the weekend I reviewed my performance so far this year. I know I have reached my own base line trading goal for the year since September. At the end of October, I hit my ambitious goal as well. Whenever that happens, I reduce position size and trading setups that I will use until the end of the year. I will also allocate more time to do my research. It is a good practice and something you should put into your own trading plans too.

When your trading goal for the year (or whatever period you choose) is reached early, it can be the result of more outlier winners (in terms of amount) than usual. It can also be the result of more winners than usual. It can also be both. Experience and my research on trading methods told me that such improvement usually would not last.

By reducing the overall position size I am going to take until the end of the year, I am reducing the impact of losing trades significantly. I am not talking about a cutback of just 10 to 15 percent in size. I am reducing my position size by half. Should these last two months of the year I am doing fine, I have nothing to worry about. On the other hand, if I am facing significant setbacks, I will stand to keep more of my money I made so far.

Those who read my writings know that I am someone who advocate tracking each trading setup one uses separately. This tracking of your own performance based on each separate trading setups can help you identify which one has been doing exceptionally well. In my case, it is the counter-trend setups that have been doing so good I know they are likely going to fail more going forward. So until the end of this year I will be limiting my counter-trend trades significantly.

Some of my trading buddies prefer outright stop trading after their goals for the trading year is reached. Quite a few would take a long vacation or work on a hobby project until after New Year. That is the other way to avoid losing money back to the market.

Spending the hard earned money on yourself and family surely beats giving it back.

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Okay. You said you are going to upgrade my internet access speed during the day.

Fine.

I asked, "How long would it take?"

The other side, "5 to 10 minutes, then you will experience a boost in performance."

I said, "Okay. Let’s do it then."

My biggest f$#king mistake so far in all the things I remember that I screwed up over the past 2 months.

My internet was gone. Then it never came back.

Waited 30 minutes. Nothing back online. I called and waited forever. Finally got someone on the phone and then switched me to at least 3 other places before I landed to the right place. Struggled with the tech staff forever and no cigar.

Was told that I have to wait for another 30 minutes or so. They will escalate the issue and have it resolved quickly.

I am a very patient person so I waited. Hours passed and nothing back online.

Market closed and I already called my brokerage to make sure all orders are cancelled and my day trade position is stopped out. I told myself, "At least one thing settled and not messed up."

More calls made. No results.

Was asked to replace my perfectly working cable modem (at least right before they disconnected me) at a nearby Rogers store. Their computer system at the store is not functional and the replacement cable modem has to be activated by phone …

At least 8 hours wasted, a trip to their store, and finally I have internet access again.

At this point I am very curious – the supposed top of their line internet access speed of 150 Mbps … is it really what I am getting?

The answer is no.

I checked the speed and I am not getting the speed boost I thought I am getting at all.  I am not getting even close to HALF the claimed speed. I am very disappointed.

So those of you living in Canada who have no choice but forced to use Rogers Cable Internet – you are now warned.

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I received many emails asking me when I am going to publish the next ebook.

When is Time Map 2 for Forex coming?

Will there be ebook on trading system design?

Still waiting for your work on how to trade gaps.

My writing to-do list has grown so long that if I print it out it is taller than me. Too many topics I want to cover and I have only limited time for writing outside of my other obligations.

Last week I think I figured out a solution – as oppose to writing complete ebooks and going through the editing process first, which takes a minimum of several months per ebook, I can publish the materials piecewise in premium member area. This way, I can push out more work quickly and I do not need to stay focus on a single subject for several months. For those of you who cannot wait for an organized version of my research, one more reason to upgrade your membership.

Frankly, it is very difficult for me to stay focus on a single subject for more than a few days. Hence pushing out a short piece of report at a time allows me to work faster. After completing enough number of short pieces on the same topic, I can then decide which one to go into my ebooks. That means some of the premium articles will stay as exclusive content for the premium members.

I just posted 2 new articles on Nonfarm Payroll bias last week, Nonfarm Payroll Report Bias is made available to all members and Nonfarm Payroll Week Trading Models is made exclusive to premium members. The one made exclusive for premium members is the one that I think the materials is going to be included in one of my future ebooks.

I think it is going to have positive impact on my writing speed as I am no longer stressed out on a single topic for months.

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