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I am an individual investor currently swing trading volatility ETNs (XIV and VXX). I am developing strategies for timing trades and backtesting using excel. Contango is my friend. My handle on twitter is @ContangoMojo
  • Update To The Volatility Trading Strategy Using Chandelier Stops 5 comments
    Aug 29, 2013 1:03 AM | about stocks: XIV, SVXY, VXX

    Back at the end of January I presented an article to show a good XIV trading strategy using chandelier stops as a signal to go long XIV and when to get out.

    As I mentioned in the first article, I do not strictly trade this strategy but I do use stop loss orders for my XIV trades and I tend to only go long when this strategy says to go long.

    Since publishing the article, the strategy has had very mixed results with several months of choppy trade and one month of spectacular results that made up for the previous trades.

    • The VIX spike in February stopped out the trade causing an 8% drawdown.
    • The strategy gave a buy signal in early March and made a nice 19.8% run. The VIX spike in April stopped out the trade causing a 9% drawdown.
    • The strategy gave another buy signal in late April and made a very short 4.5% run. The VIX spike in early June stopped out the trade causing an 9% drawdown.
    • Overall, in this choppy sideways period, the strategy lost 4.3% from end of January to end of June.
    • On July 1, the strategy gave it's latest buy signal and gained an impressive 41.7% before settling down and giving the latest sell signal; settling for a nice 32.4% gain.

    Here is an updated chart showing the chandelier stops on XIV along with the equity curve for the strategy.

    (click to enlarge)

    It seems like the strategy can be improved by using tighter stops to lock in more profits. And I am sure we could add indicators or other macro news filters that would keep us out of the trade completely in certain markets like the April to June taper talk market.

    Still, overall, the strategy as presented would have gained 448% in the last 2.75 years; or 13.6% average per month. Again this is not any guarantee of future results and is not statistically significant enough to bet on. We certainly could have an extended period of up and down swings like we had for 5 months this year.

    Please do leave comments below if you have any feedback on this article or the strategy.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am currently in cash but will go long XIV when we get the next buy signal.

    Themes: Volatility, ETFs Stocks: XIV, SVXY, VXX
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Comments (5)
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  • MarcJoli
    , contributor
    Comments (78) | Send Message
    Author’s reply » StockCharts .com provides a Chandelier exits indicator chart that is similar to the method I calculate in Excel. It gives roughly the same buy and sell signals as my method but uses intraday highs and lows instead of closing prices to hang the chandelier from. Also the stops can move down some which is different from the method I describe.

    4 Sep 2013, 11:56 AM Reply Like
  • Learner16
    , contributor
    Comments (105) | Send Message
    Thank you for the instablog, Marc.


    I have already tried with moving averages. For example, using an EMA(5) as a stop closing daily, it would have given a 44% CAGR since september 2011. The downside being the volatility and a larger than 30% drawdown.


    This strategy improves the return and the tail risk seems quite lower.
    4 Sep 2013, 05:07 PM Reply Like
  • MarcJoli
    , contributor
    Comments (78) | Send Message
    Author’s reply » Because I am trading only before and after work, I am more comfortable with swing trades that last weeks or months rather than days.


    I have never been very happy with any strategies using moving average triggers because of the occasional nasty whipsaws when price bounces along a moving average.


    I picked this chandelier stop strategy to give the trade enough room to work. I get in a bit late, and a give back a portion of the swing but I avoid the quick whipsaws that are so painful in real life trading.


    If I had more time to watch the trades, I could use a quicker entry and tighter stops; and would deal with the whipsaws.
    4 Sep 2013, 10:21 PM Reply Like
  • Learner16
    , contributor
    Comments (105) | Send Message
    Marc, I like the idea and it seems sound to me, but I do not think ATR stops work very well. I agree moving averages give whipsaws, but ATR stops are usually to wide for me.


    I am attaching a link to a very good study about ATR stops, just in case it can be useful to you:

    23 Sep 2013, 06:57 AM Reply Like
  • MarcJoli
    , contributor
    Comments (78) | Send Message
    Author’s reply » The strategy gave a buy signal last night after a few days of rallying, VXX has now moved 2ATR above the recent closing low.


    This time, I am not planning to jump in the trade mechanically because I feel as though the taper talk leading to the September FED meeting means XIV will erode from here until we get the "all clear" on the taper.


    I cannot predict where XIV will go from here, but I can predict that traders will get fearful in the days before the FED meeting the they will bid up VIX and VIX futures. After the FED meeting might prove to be a better time to short volatility.
    10 Sep 2013, 12:49 PM Reply Like
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