Backtest: Logical-Invest’s Bollinger Band Strategy

This is a test of a VIX trading strategy from the excellent Logical-Invest. The strategy uses Bollinger bands to trade VIX ETPs like XIV (or short VXX).

The graph below shows results of the strategy trading XIV (blue), compared to buying and holding XIV (grey), from mid-2004. Read about test assumptions, or get help following this strategy.

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Strategy rules: calculate Bollinger bands for XIV using a 20-day lookback and width of 1.4. Go long XIV at today’s close when XIV will close above the middle band. Hold the position until XIV will close below the lower band, and then move to cash.

The strategy is in a roundabout way a momentum strategy. The strategy is buying XIV when it’s showing strength, and holding the position until XIV breaks down badly enough to fall below its lower band.

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Note that our backtest differs from Logical-Invest’s original test in three ways:

  • LI’s test began in early-2009. We’ve added nearly 5-years additional simulated data (1).
  • LI’s test assumed we shorted VXX, whereas I’ve shown results trading long XIV to allow an apples-to-apples comparison with other backtests here at Volatility Made Simple.
  • LI’s test assumed we executed trades at the next day’s open, rather than at today’s close. I test at the close because there is no reliable method for simulating pre-2009 data for the open.

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Most of the simple strategies we test here a Volatility Made Simple are using some metric other than price to guide trades. Instead they’re trading based on, for example, the current state of the VIX futures term-structure or estimates of the volatility risk premium (i.e. all of the relationships we showed in Four Graphs to Rule Them All).

Logical-Invest’s strategy tested here ignores all of that. Like the 10/100-day MA Crossover strategy we’ve tested previously, LI’s strategy uses only the price of the VIX ETPs themselves to signal trades.

I don’t think traders should rely solely on price-based indicators to trade VIX ETPs (and LI would agree). There is so much unique insight locked up in those other non-price-based indicators, that it’s foolish to ignore them.

But having said that, a bit of price-based trading is useful. VIX products are extremely new and the relationship between the term-structure, various VRPs, and VIX ETPs is evolving. Having price-based indicators available is useful as a sanity-check in case those non-price-based indicators go off the rails.

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A big thank you to Logical-Invest for posting this strategy.

When the strategies that we cover on our blog (including this one) signal new trades, we include an alert on the daily report sent to subscribers. This is completely unrelated to our own strategy’s signal; it just serves to add a little color to the daily report and allows subscribers to see what other quantitative strategies are saying about the market.

Click to see Volatility Made Simple’s own elegant solution to the VIX ETP puzzle.

Good Trading,
Volatility Made Simple


Wonk note: Data prior to the launch of XIV has been simulated. We’re able to do this accurately using a combination of the indices and the futures data on which this ETP is based. Read more about simulating data for VIX ETPs.

Posted in Strategy Backtests.