This is my third post on Futures.io, including the introductory post. Up to now I have exclusively traded U.S. ETFs. I am currently transitioning to futures and have zero futures trading experience and am a complete and utter newbie when it comes to futures trading. I just had my CME data feed connected for the first time yesterday, that’s how new I am to futures.
While all of the materials I present in this thread are based upon ETFs, I believe the concepts may have application in futures trading and strategy development. I found the Vix to correlate to my ETF trading (no surprise), but have performed no research into a similar correlation in specific futures instruments. However, I believe the methodology I’ve described in the attachments may possibly be ported to futures quite easily by identifying appropriate sentiment markers (indexes, Vix) and quantifying their zones at which point a trading style or an AT should change or stop trading altogether.
My goals in sharing this information with you the Futures.io community is meant as an attempt at thanking the other contributors to Futures.io, from whom I’ve learned and am learning so much.
Trading with accurate information and assumptions is critical, so this may help some traders in approaching the market from a more accurate perspective. To my knowledge, the zone conclusions I’m sharing here are original concepts.
By identifying Vix key levels (or other market sentiment marker), there is the basis for a simple filter that I believe assists a traders' approach to discretionary and AT trading, i.e., when market sentiment is in Zone C, then trade Style C or use AT C, when market sentiment is Zone D, then trade Style D or use AT D. At least it is something to consider in strategy development. Traders can become lulled into a false sense of security by trading and training strats in Zone C (our current zone) and then going through a Zone E or F event. A lot of money can be lost real fast as what was biased to work your way, is now biased to work against you. An AT or swing trading style that was working great for you for years, suddenly suffers back to back to back to back to back to back losses, as illustrated in the attached Pic 2 that overlays sentiment zones on SPY.
You may think that you've inoculated your AT strategy or trading style for high Zone D through F events, and you may have, however consider this. Since 1/1/2004 to 11/1/2015, there are a total of 299 months. The total of the time in Zone D through F spent in the deep bear bias before a 25% drop in the Vix from the HH, to start the reverse of the bear Bias, i.e., the beginning of the bull run, was, wait for it, 12 months. That is 303 potential overnight holds, excluding 52 Saturdays and 11 holidays. Since 1/1/2004 through 11/1/2015, not counting the aforementioned extremely bear biased 12 month overnight hold period, there is a total of approximately 3,288 overnight holds, excluding 618 Saturdays and 114 holidays. This approximately 3,288 (bull biased) to 303 (extreme bear bias) ratio creates a very high likelihood that in running an AT's backtest, the 303 extremely bear biased overnight holds will be overpowered by the 3288 bull biased overnight holds and the backtesting software may find a solution that worked in the past, but doesn't work in the future, given that there was only a 303 bar samplings to work with (in overnight holds terms). The trader may think that they can trade through the 3 month period, and I'd agree, so long as during that 3 months there was an appropriate sizing of the trade for the extremely high risk to reward that exists over those 303 potential overnight holds. Again, the backtest softare may have incorrectly tweaked the AT strategy given the 3,288 to 303 ratio. The result of this will be the potential of 3 months of back to back to back to back to back losses where the amount of equity committed was so high, as compared to risk/reward, that the trader's account blows up.