Dow Jones - VIX ( 06.2011 - 08.2014 study)
The rules for this strategy are very simple. When the VIX index crosses over 18, wait for it to close below 18, on a daily basis.
If it closed below 18, enter a long trade. There are two possibilities for setting the stop loss. If, at that time, the Dow has been in a trading range, place the stop below that trading range. If there is no trading range, place a stop below the signaling candle, not only one tick below, leave some space for wiggles. Taking profits is the hard part, and that is totally discretionary, as I have not found a rule for that.
Between 06.2011 and 08.2014 there have been 15 buying signals, 8 of them have resulted in very profitable trades and 7 of them resulted in loses. I have marked every trade on the chart, with the take profit at the most extreme point. I hope you understand that this study is hypothetical and that no one would ever take profits at the most extreme point of a rally. Considering that you don't have an edge because 50% of trades are profitable (my guess is that if you backtest a few more years the percentage will remain roughly the same, ranging from 45% to 55%), the only thing that makes this strategy profitable is getting rid of losers fast, and letting the winners roll.
This is a strategy that can be used on its own, but it's not the best out there. The second possibility is using this model for confirmation for another strategy.
As I said before, I hope you understand that these results are hypothetical and you would never make as much money as the risk/reward drawings point out.
If it closed below 18, enter a long trade. There are two possibilities for setting the stop loss. If, at that time, the Dow has been in a trading range, place the stop below that trading range. If there is no trading range, place a stop below the signaling candle, not only one tick below, leave some space for wiggles. Taking profits is the hard part, and that is totally discretionary, as I have not found a rule for that.
Between 06.2011 and 08.2014 there have been 15 buying signals, 8 of them have resulted in very profitable trades and 7 of them resulted in loses. I have marked every trade on the chart, with the take profit at the most extreme point. I hope you understand that this study is hypothetical and that no one would ever take profits at the most extreme point of a rally. Considering that you don't have an edge because 50% of trades are profitable (my guess is that if you backtest a few more years the percentage will remain roughly the same, ranging from 45% to 55%), the only thing that makes this strategy profitable is getting rid of losers fast, and letting the winners roll.
This is a strategy that can be used on its own, but it's not the best out there. The second possibility is using this model for confirmation for another strategy.
As I said before, I hope you understand that these results are hypothetical and you would never make as much money as the risk/reward drawings point out.