Hi Quiet1, can you please describe the serious risk I have taken? The only risk I can see that I've taken is potentially being overexposed to VX. Do you think that I am dangerously exposed to VX? Thanks.
5 Vix contracts is $5000 per VIX point and about $55000 in initial margin currently. If VIX futures had a small crash to say 23 you would be seriously down on your account, possibly even automatically stopped out by your broker due to an increase in margin requirement. And that's just a bad outcome not the worst case scenario. You can't look at VIX as a normal futures market. It does not matter that the biggest 1 day rise in history was X%, you should be comfortable with VIX rising maybe 50 to 100% more than it ever has before. Basically you need to ensure that it's virtually impossible for the market to wipe you out. As it is, it's quite easy to imagine fairly plausible scenarios where your account loses 50%++ by large but not catastrophic geopolitical events.
Thanks for that explanation, Quiet1. Based on what you say, I fear that I may have some error in my implementation of the system inspired by GAT's system, given that it has called for me holding 5 short VX on a $130k account at 30% volatility. I think I may have to liquidate, and revert to paper trading the system, until I see where my error is. Thanks for the warning.
It sounds like you have not even done a proper backtest yet. Do not jump straight into the trading a system live until you have tested all your rule implementation against historical data. A bug in your code can wipe out your account
I hope I'm not hijacking this thread. If so, please let me know. To summarize, I am using a lot of GAT's excellent open source code to run my system. I am using 8 instruments, with $130K, running at 30% volatility: Vix, Nasdaq, Leanhogs, GBP, Platinum, US2, Eurodollar, GAS_US. Here is the backtest with a sharpe of .82, and some other statistics. The annual returns assume a constant capital of $130K. Sharpe: 0.8237007586663045 [[('min', '-35.16'), ('max', '38.82'), ('median', '-0.0001634'), ('mean', '0.1124'), ('std', '2.182'), ('skew', '-0.4452'), ('ann_mean', '28.76'), ('ann_std', '34.92'), ('sharpe', '0.8237'), ('sortino', '1.04'), ('avg_drawdown', '-19.87'), ('time_in_drawdown', '0.9454'), ('calmar', '0.3123'), ('avg_return_to_drawdown', '1.448'), ('avg_loss', '-1.256'), ('avg_gain', '1.524'), ('gaintolossratio', '1.213'), ('profitfactor', '1.176'), ('hitrate', '0.4922'), ('t_stat', '5.421'), ('p_value', '6.044e-08')], ('You can also plot / print:', ['rolling_ann_std', 'drawdown', 'curve', 'percent', 'cumulative'])] 1975-12-31 16584.943069 1976-12-31 57007.095302 1977-12-31 185288.524317 1978-12-31 9038.766412 1979-12-31 28444.836655 1980-12-31 -3524.120744 1981-12-31 90194.841088 1982-12-31 52757.341149 1983-12-31 1222.886848 1984-12-31 49404.534208 1985-12-31 43364.894901 1986-12-31 59814.564226 1987-12-31 57271.110810 1988-12-31 -34722.603749 1989-12-31 -6298.312574 1990-12-31 100327.008972 1991-12-31 96966.323021 1992-12-31 -1769.737457 1993-12-31 70971.363596 1994-12-31 14731.283840 1995-12-31 10882.497068 1996-12-31 81813.083127 1997-12-31 -21759.192076 1998-12-31 62131.275456 1999-12-31 -54857.617955 2000-12-31 88060.679064 2001-12-31 10110.929835 2002-12-31 74961.156730 2003-12-31 50043.099646 2004-12-31 61388.005078 2005-12-31 -30585.911546 2006-12-31 -32560.409092 2007-12-31 -40131.714264 2008-12-31 65827.532510 2009-12-31 22804.673778 2010-12-31 138670.035128 2011-12-31 67260.134254 2012-12-31 33172.274671 2013-12-31 -811.251820 2014-12-31 72000.055353 2015-12-31 28589.906901 2016-12-31 3245.530233 2017-12-31 27333.300763 Would be interested in your thoughts. Thanks.
What is the max drawdown historically? Even on the annual returns level, you can see that 2005-2007 would have almost wiped you out
I'll have to take a look at how to derive max historical drawdown. I am willing to accept the risk of that 77% drawdown that you noted, given the potential upside of +20% annual returns. I have my other capital in etfs, and all of this is meant for retirement which is maybe 30 years away.
Are you prepared to top up your capital for 3 consecutive years (2005-2007)? As per your earlier post, you would have to increase your capital to $130k at the start of each year.