Couple of quick observations....

You know I'm working this weekend on a few different angles, but I thought about this. If you wanted to take the market down for maximum effect or do anything for maximum effect, wouldn't it make sense that you had all the players in place?

This week was Rosh Hashanah (the Jewish New Year), surely the trading desks were not at capacity. It got me thinking about low volume and the high volatility moved that come with it. Think bout all the low volume stocks we made big money in with one or two day moves. One gained 180% in three days, but it was their low price and volume that really made them move.

So I ran a very simple backtest , it wasn't optimized or even well though out, it was just to see the effects of trading during volatile times. So I used a volatility indicator that goes from 1-100, 100 being the highest volatility and I set up a simple buy/sell short system. When price falls below a 75 day moving average you go short, when if is above the average you go long, so long as volatility is under 30. When volatility rises above 30, you exit all trades. This has you sitting out long periods of the market, sometimes 6 or 7 month stretches. You miss a lot of price action, but guess what, it outperformed buy and hold by 17% as tested over a 4 year to date period. I've told many of you over the past months that tops are volatile and they are like meat grinders for most trader's accounts.

Running the same scan with the same buy/sell short criteria, except this time being in the market all the time, with no volatility conditions, I found that this scan underperformed the above by -10%.

To put this to practical use, you might consider scaling back your position sizes during volatile periods. I'm sure I'll work more on this and optimize it for better results, to find the volatility level that gives the best performance and a better entry exit system.

I ran one other scan, this time I went long the IWM, no leverage just long or short with a 7% stop-loss. The condition was to buy the IWM when UUP (a proxy for the dollar index) made a 10 day high or a 10 day low, again this was not optimized. Simply put, if UUP drops to a 10 day low you buy the IWM (Russell 2000 ETF with no leverage). If UUP makes a new 10 day high, you sell short the IWM. The system is always in the market either long or short and over a 3 year test period, the system returned 200%. Not bad huh? Most Hedge Fund managers can't match half that performance. Here's a screen shot. The bottom equity line is simple buy and hold as Wall Street has preached for decades, you can see it severely under performs and your account would have lost 18% over the test period. Clearly there's a correlation between the dollar and the markets.

While the chart shows the SPY, the IWM was the symbol tested. Note the equity line nearly doubled.


More coming this weekend....