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Performance of a Volatility Trading Strategy

The details of the volatility trading strategy are available to All in One premium content subscribers who renew their subscription for three months or to new subscribers for six-month initial subscription. Contact us for details. This offer may end at any time.

General description of the strategy

The strategy trades UVXY long/short in the daily timeframe. All positions are entered at the next open after the signals are generated. This strategy is not data-mined but based on sound analysis. Volatility adaptation is used to boost returns and then maximum drawdown is adjusted by applying diversification and risk management. The period of all backtests is from 01/03/2012 to 05/21/2021. No commissions are included.

The strategy shows in backtests potential for high reward but at higher risks. This type of strategy is suitable only for experienced market participants who understand market risk and can manage it well.

Performance of core rules

Below is the performance of the core rules of the strategy before any volatility adjustments and diversification.

Annualized return is 75% but it comes at high volatility and maximum drawdown, 88.4% and -66.8%, respectively. Sharpe is 0.85. There are 119 trades (59 long and 60 short) and win rate is 51.3%. Year-to-date return is 63%. Largest return is 328% for 2020.

Performance boost

Below is the performance of the core strategy after adding volatility adjustment.

Annualized returns is 98.2% but volatility and maximum drawdown although a little lower are still high at 87.3% and -62%, respectively. Sharpe increased to 1.12 and MAR (CAGR/MDD) is much above 1. There are 101 trades (50 long and 51 short) with 52.5% win rate. Year-to-date return is 63%. Largest return is 328% for 2020.

Adding risk management and diversification

Annualized return drops to 60.2% but maximum drawdown and volatility also fall to acceptable levels for this type of strategy at 54% and -55%, respectively. Sharpe and MAR are above 1. There are 220 trades (110 long and 110 short) with 50% win rate. Year-to-date return is 38%. Largest return is 190% for 2020.

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Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker

Data provider: Norgate Data

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