Thursday, April 28, 2011

System Strategy Change

All system trades will now take place on the open the following day. 

Background: My system uses VIX data to help determine signals.  The problem is that the VIX  at 3:59:59 pm is different from the closing VIX value at 4:15pm.  My model is calibrated using the closing price of VIX, which can evidently jump significantly in those 15 minutes. When my signals are borderline, this is a big problem.  I'm not sure how, but this hasn't really been an issue up until recently.   Two days ago when I got a short signal, the VIX was 15.55 right before the close.  The critical threshold was 15.57 (refer to my 4/26 post) and between 4 and 4:15 it jumped to 15.62.  This higher VIX # would've generated a "hold" signal, which means I would've still been long. Then it happened again today. The VIX was down almost 7% at 4pm resulting in a hold signal, but has since jumped up to a value of 14.62 which would trigger a short signal.

This problem I doubt will ever go away, so I'm making an immediate change to my strategy.  I will not be forecasting the signal before the close anymore.  I will have to wait until 4:15 to get the signal and trade on the open the following day. 

The good news is this should make life simpler.  Visit the website sometime at night to get the signal, place an order to buy TNA/TZA on the open, and you're done.  A market order would work, although a limit order set to the closing price is probably a better option so as to avoid a bad fill on a gap down.  More on this later...   Have a great evening!

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