About Our Daily Indicators

We track several different indicators for trading volatility ETPs (Exchange-Traded Products). Each indicator is a signal-based strategy which allows us to identify and trade along with directional trends. By using signal-based indicators we are able to remain objective in our trading and minimize errors that arise from making emotion-based decisions.

Following our strategies simply involves trading securities in the same direction of the indicator. This means buying a security when the indicator becomes positive, and selling a security (and buying the inverse) when the indicator turns negative.

Each indicator takes daily readings of market data after the close. The indicator values are then published on a set of gauges on our Daily Forecast page and emailed to subscribers. If any indicator changes direction and triggers a buy or sell signal, automated email alerts are also sent to any subscribers who wish to receive that alert.

Dual Strategies For Trading VXX & XIV
We currently offer two strategies that apply to trading short-term VIX futures ETPs, such as VXX, XIV, and SVXY. Each of these strategies takes a different approach for maximizing gains. Because no single strategy is perfect and the market is inherently unpredictable, we use the two strategies simultaneously to compensate for weaknesses within each of the strategies to reduce drawdowns and smooth out returns over months and years.

1) VXX Bias strategy
  - Our Bias strategy is constructed using VIX futures data along with a component which monitors underlying momentum changes in the term structure.
  - A positive value indicates a buy signal for VXX, while a negative value indicates the sell signal (and a buy signal for XIV).

2) Volatility Risk Premium (VRP) strategy
 - Our VRP strategy is a variation of a commonly used indicator for measuring forward implied volatility versus actual volatility.
  - A positive value indicates a buy signal for XIV, while a negative value indicates the sell signal (and a buy signal for VXX).

--> Combined "VRP+VXX Bias" strategy
 - We buy XIV or VXX only when the VXX Bias and VRP signals agree on the direction for the trade.
 - When they do not agree, the portfolio is in cash (approximately 30% of the time).


Tracking Performance
In February 2016 we began automated trading of our VRP+VXX Bias and VXX Bias signals on Collective2's platform. The performance of the indicators using third party verification is shown below.

VRP+VXX Bias ("Trading Volatility 1"):


VXX Bias:



Forecast History and Full Backtesting
The indicator values for the most recent six months is always displayed on our Daily Forecast page.

Annualized percent gain/loss in full backtested results for each of our strategies used with XIV & VXX are shown in the following table. For benchmark comparison purposes, a portfolio consisting of a "buy and hold" approach in XIV is included in the right column (Note: Daily prices for VXX and XIV prior to fund inception have been derived from actual VIX futures data for the purpose of maximizing the length of the lookback period.).

Disclaimer: Trading these strategies is risky. Please read our Terms of Use for additional disclaimers.




The annual gain/loss data can be visualized in the graph below (data through April 2017).



Here it becomes more apparent how strategy performance can differ depending on the specific market conditions and why we find it important to take a dual strategy approach. The VXX Bias strategy has an advantage in handling periods of moderate drawdowns and sustained periods of backwardation. Meanwhile, the VRP strategy is better with choppy markets and periods of gradually increasing volatility when VIX futures are in contango. The two of these together provide more consistent returns than using just one strategy alone, although each one is vastly superior to a buy-and-hold approach with XIV.

While the annual return of our VRP+VXX Bias strategy has always been positive and exceeds an average of 130% per year, monthly performance can be volatile. The table below provides monthly returns of the VRP+VXX Bias strategy.



Similarly, the table below provides the monthly returns for the VXX Bias strategy.



Strategy statistics for each of the indicator's annual returns:


Strategy statistics for each of the indicator's monthly returns:


For detailed historical backtests of our indicators, please see the links at the bottom of our Subscribe page.

Note: If you are new to this area of the market, you can read about how volatility works and why it is possible to forecast volatility ETPs in our e-book, Fundamental Concepts and Strategies for Trading Volatility ETPs. 



Strategies For Trading ZIV
Similar to the VXX Bias, the ZIV Bias measures headwind/tailwind of mid-term securities, specifically ZIV and its inverse, VXZ. It is also based on the shape of the term structure but includes an adjustment based on the shape of the front end of the VIX futures term structure. The gauge's scale is also normalized on a scale of -10 to +10, with the majority of values falling between -2 and +2 and a neutral zone at +/-0.5. 

- A positive value for ZIV Bias indicates a buy signal for ZIV, while a negative value indicates the sell signal for ZIV.


More on the VXX Bias Indicator 
The VXX Bias provides a holistic view of the directional force of VXX, and
 can be conceptualized as a headwind or tailwind for the security. It is determined by the roll yield of first and second month VIX futures (learn more about the roll yield in our e-book) along with momentum and state change inputs. The gauge values are on a scale from -10 to +10, with a more negative reading indicating a stronger negative bias (headwind), and a more positive reading indicating a stronger positive bias (tailwind). The gauge's range covers +4 and -4 standard deviations of values since March 2004. Therefore, you can generally expect readings for the VXX Bias to be between -3 and +3.  

Historically there have been very wide gaps between first and second month VIX futures leading to extreme readings. On the negative side of the VXX Bias gauge, we've hit as low as -5, most recently in March 2012 when front month VIX futures were at 16.15 and second month was up at 21.6. On the positive side of the gauge we've had readings above 10, notably in Oct 2008 when front month was at 64 and second month was 42.9. Each of those extreme readings translate into very strong directional moves for VIX ETPs, and someday we may see them again.

Because VXX is the inverse of the funds XIV and SVXY, the VXX Bias forecast applies to those securities as well, but the negative needs to be changed to a positive or vice versa. 


Further documentation of backtested results using the VXX Bias strategy is available in this post.


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Hypothetical and Simulated Performance Disclaimer
The results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown. Backtest results do not account for any costs associated with trade commissions or subscription costs.  Additional performance differences in backtests arise from the methodology of using the 4:00pm ET closing values for XIV, VXX, and ZIV as approximated trade prices for indicators that require VIX and VIX futures to settle at 4:15pm ET.


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