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CVI- A New Indicator to Predict Trend vs MR Performance

August 27, 2009

I would like to synthesize some of the previous work to present a valuable indicator —the CVI—that helps project whether trend following systems or mean reversion systems will perform better on the S&P500. The CVI stands for “Composite Volatility Indicator.”In this post we will look at how CVI helps to moderate daily follow-through. As a primer for this post I recommend reading two articles: Michael Stoke’s (MarketSci) original article on daily follow through: http://marketsci.wordpress.com/2008/07/17/evolving-markets-dynamic-systems-daily-follow-through/  In addition, under a different moniker, Rob Hanna of Quantifiable Edges has written about trend vs chop on his blog: http://quantifiableedges.blogspot.com/2008/08/how-to-trade-choppiest-environment-in.html Rob has designed some excellent trading systems for subscribers  to take advantage of this effect.

Coming soon! ETA Friday aft

8 Comments leave one →
  1. CarlosR permalink
    August 29, 2009 10:16 pm

    “Coming soon! ETA Friday aft” Dave, you are such a tease!

    Or maybe I should ask, exactly *which* Friday afternoon? 🙂

    Seriously, this is a truly excellent series, and I’m looking forward to the rest of it.

    • david varadi permalink*
      August 29, 2009 10:34 pm

      thanks carlos and sorry, sometimes work gets in the way of my blog posting! i try to be as punctual as i can! don’t worry the post will be up soon enough.
      dv

  2. mike permalink
    August 30, 2009 3:44 pm

    Have you looked at Actual Volatility compared to VIX? Wonder how that looks.

    • david varadi permalink*
      August 30, 2009 4:10 pm

      hi mike, i actually covered that in the last post on implied vs historical volatility.

      cheers
      dv

  3. Basilderat permalink
    August 30, 2009 7:34 pm

    David,

    A simple system also works well:

    Assign a -1 if market mean reverts
    Assign a +1 if market follows through (momentum)

    Nice downward channel on S&P500 since 1st October 2007, currently -80, although last 40 days have been random (neither MR nor momentum winning)

    Cheers,
    Peter

    • david varadi permalink*
      August 30, 2009 8:17 pm

      good comment, in truth what you are suggesting is to trade the equity curve which i also recommend doing for just about any strategy. what this is designed to do is to predict or forecast MR or trend to give advance warning. This improves joint performance substantially.

      cheers
      dv

  4. Basilderat permalink
    August 30, 2009 8:27 pm

    David,

    I just use that for indication on where market MR is at. I have an actual equity curve filter based on smoothed 5 day z-Score of the equity curve itself. Less than zero, go to cash, above zero, all in. Not perfect, but avoided a few big drawdowns and preserved > 90% of gains.

    Cheers,
    Peter

    • david varadi permalink*
      August 30, 2009 9:28 pm

      nice work……..you will find this to be a good complement by simply adjusting the % to bet under different CVI predicted conditions.

      dv

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