We trade VXX in four different time frames, all based upon our trend following algorithm. Each of the time frames is its own easy to trade trend following system insofar as being an independent stand-alone trading system. The different time frames can also be combined to fine tune money management.
OVERVIEW
There are 3-4 times a year when VXX goes up anywhere from 10-100% in a matter of weeks. That’s why we take all VXX LONG signals. During the rest of the year, VXX has a built in trend bias SHORT. That’s why we take all SHORT signals and we “go Short” VXX by going LONG XIV, which is the inverse-VXX fund.
TRADING STRATEGIES
Here are what I consider the most efficient and profitable trading strategies within the purview of four separate time frame trading models. For most trading, pick one and stick with it. That doesn’t mean you should not use a combination of timing models, it just means you don’t have to in order to gain the benefits of trading these models. Every trader has a different tolerance for risk and incurring losing trades.
What follows is a basic summary of each VXX trading model’s characteristics and returns. There are enough ways to trade VXX with leverage to significantly increase the returns described below, especially using TVIX for LONG trades, while using XIV for the SHORT signals.
(1) Daily Trend Model
In three years of trading, the previous two years in real time and the first year via a backtesting pro forma, there have been 18 trades, 8 wins and including the current trade, 10 losses. Despite less then 50% wins, this trading system has generated a total return of 250% with an average return per trade (including losing trades) of 11.19%. That works out to about one trade every two months. Its a low maintenance system, a true trend following system on a stock (ETF) that trends as well as any other stock or index on the board.
(2) Hourly Trend Model
This model trades much more often, on average one trade per week, 48% winning trades and a total return from January, 2010 to date of 403%. The outsized total return, compared to two years of daily signals, is the result of compounding of gains, i.e. the more trades, the more compounding. Note that this model, like the Daily model, has slightly more losing trades then winning trades. The average trade (including all losing trades) is only +2%, but what makes this system’s total return so high is that the winning LONG trades get into those big percentage gains much earlier then the Daily model. The trade-off is dealing with a lot more losing trades (2 losing trades a month), albeit relatively small losses.
(3) 240 Minute Trend Model
This model shows 45% winning trades over the past two years, trades about once a month and has generated a total compounded return of 203%. This is a “compromise” trading model, a compromise of the Hourly and Daily models. I haven’t been addressing this model very much in my commentaries or updates, but as the statistics show, it has done very well in real time trading over the past 25 months.
(4) Weekly Trend Model
With only five trades in three years, there just are not enough data points to gauge the profitability of this model. But it can be useful for using it as a filter for trades signaled by the other models. With the other three models showing such good stand-alone returns, I’m not certain that filtering is going to improve profitability, but until I run pro-forma simulations, I won’t know for sure. I wanted to get this out, or I would have run those already. I will get to it eventually.
(5) Which Model to Trade?
The biggest home runs in VXX trading come from the LONG trades. If you can stand the heat of losing on half of your trades, on average of one losing trade every two weeks, then the Hourly model will generate the best overall returns. The Daily model is the easiest to trade, it is almost a Buy and Hold system and is the purest trend following system. The 240 Minute model is there for the indecisive, or, might be the best one of all. I can’t decide.
The key take-away is that as stand-alone trading systems, each one has at a minimum been doubling capital each year. That suggests another consideration, why trading anything else? The answer is that the most successful private equity hedge funds (including the one I manage) are all trend following funds diversified among multiple tradables, stocks, indexes and commodities. Their multi-year track records beat measuring standards for stocks, bonds and commodities, regardless of occasional losing years. That is because when they win, they win big and it is because some of their trading holdings hit grand slam home runs even though others might languish.
My studies show that VXX has the high probability of hitting those grand slams (+100% or more) with my only caveat that VXX has only existed about three years, so it has a limited set of data points. That said, what I have seen and tested does appear to be statistically significant, i.e. it is unlikely to have occurred by chance.
I hope this adds some perspective and ideas as to how to trade VXX. As I have said all along, find something that works, then trade it.
VXX TREND MODELS – HISTORICAL CHARTS
We have had great success trading the Daily and/or 240 minute VXX Trend Models. We have the VERY BEST DAILY VXX DAILY TRADING SYSTEM AVAILABLE ANYWHERE AT ANY PRICE. Bold statement? You bet.
- VXX Daily Trend Model
This VXX Daily Trend Model continues to perform the best out of all of our trend following trading models. The returns generated by taking the signals seen above, all of which were generated in real time as we followed along, have been excellent. Nine signals in the past 18 months, that’s one trade every two months. Five winners, four losers, consistent with a 50-50 win/loss ratio and consistent with winning trades out-sizing losing trades by a significant margin.
Comment from “Andy” a charter subscriber to AllanTrends:
“…..the Daily has been a killer.
“Just stepping in Jan 3 of 2011 and closing out on Dec. 30 of same year, I show 108% gain.
“Since you initiated this model in spring of 2010, it is golden. I ran a compound study, just for kicks.
“340%”
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We have now added the VXX Hourly Trend Model to our arsenal. Since we had not been trading it real time before October, 2011, the results that follow have to be deemed pro-forma, or hypothetical and of course, past results are no guarantee of future success.
Since May, 2011, the VXX Hourly Trend Model has returned a total profit of about 80% with 18 trades; 11 wins and 7 losses. The average win returned 10.50% and the average loss was 7.20%. That amounts to 61% winners against 39% losers with the winners gaining an average of about 50% over the losers.
This is no outlandish get-rich-quick chest beating trading system. Just the cold hard facts and a way to make money following a single ETF measuring volatility in both up trends and down trends. The system doesn’t care if the market goes up or down…….and neither do we. It only cares about making money…..and so do we.
Examples of VXX Hourly Trading Signals
VXX Hourly Trading Model, June-July, 2011
VXX Hourly Trading Model, July - September, 2011
VXX Hourly Trading Model, October, 2011
Update February 23, 2012
VXX 240 Minute Trend Model
XIV is the inverse of VXX and can be used to go LONG whenever VXX is on a SELL
Past performance is not a guarantee of future success.
I’m going to implement the VIX Hourly trend trading system using options. With 18 trades in roughly seven months it seems that most positions are short term – a few weeks at the longest. If I were to use put and call options on the VIX, how far out should I go on the expiration date of the options? Something in the three month or less range seems about right, but I’d like other opinions – Allan’s as well.
I’d like to see at least 3 weeks of time left on the options.