That's what it seems to me that truetype is saying. GAT, do you have an opinion on this? Seems like we may want to remove Vix from a trend following strategy, in case we get another 1987.
It's a free country. But when I see a post "lost 12% in two days" trendfollowing, I think, (1) way too much VIX and/or (2) way too high target vol.
How did you manage to be up 40% over the past year doing trend following? Are you invested in some exotic stuff?
Hi GAT, what do you think of this fitting process proposed by Dr Ernest Chan? http://epchan.blogspot.sg/2017/11/optimizing-trading-strategies-without.html
Sorry, it was ~30%, my bad. In addition, a chunk of that came when I less diversified & more lucky (outcome of French election & CAC40 gapped in my favour). January was still great though.
Following everyone's advice, and realising how quickly vol can spike on bad news, I realised that a '2008' style spike might result in my account being bust. I'm not sure if it would have affected me (I trade the contract three months out), but some risks aren't worth taking. I exited all my volatility positions. Effect on backtest is significantly worse results, both in terms of drawdown & sharpe. If anyone has any other thoughts on it, please contribute.
If it makes you feel uncomfortable, and you can't sleep well due to it, then it might indeed be better to remove those instruments. In my case: I do use V2TX (not the USA VIX), but assign a very low weight percentage to it.
This week will separate the sheep from the goats -- the truly diversified trendies from those who are just riding the 10-year bull market.
I don't trade quite the way you guys do in this thread, but for cases like this, I overlay some common sense position sizing constraints using cave man math. The thought process may sound silly but it has saved a lot of jobs. Ideally, you want a baseline layer of risk management that is crude and model free. From there, you can fine tune without violating your baselines in order to maximize mean/variance or whatever you prefer. In your particular case, I would do something like the following: -During the '87 crash VIX was said to spike to >150, so let's assume a worst case of 200 -Third month futures are very unlikely to get anywhere near that high, so call a rough max of 100 (although it's probably considerably lower than that) -That's ~600% higher than where things are trading now -Select a survivable loss number from the position, say -30% on the account -Then back into your max position size which would be contract value equal to a ~5% allocation in this example Something like that should allow you to sleep at night without completely missing out.