Backtest: Logical-Invest’s Moving Average Crossover Strategy

This is a test of another VIX trading strategy from the excellent Logical-Invest (see our previous test of LI’s Bollinger bands). This one uses 5/15-day moving average crossovers 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: Go long XIV at today’s close if its 5-day simple moving average (SMA) will close above its 15-day SMA. Hold until its 5-day SMA will close below its 15-day SMA, and then move to cash.

The strategy (like the Bollinger band variation) is in a roundabout way a momentum strategy. The strategy is buying XIV when it’s showing recent strength, and holding until XIV moves back below its intermediate-term average.

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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 for 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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As you would expect intuitively based on the strategy’s rules, it’s done a good job sidestepping most of XIV’s significant drawdowns because it’s forcing the strategy to cash when XIV begins to move against the trader, regardless of all other considerations like the state of the VIX futures term-structure, etc.

But that eagerness to exit positions quickly also leaves a lot of gains on the table when XIV is in a consistent uptrend (i.e. VXX is in a strong downtrend), as has been the case the last 2+ years.

The Bollinger band strategy we tested previously helped to answer that by making it a bit more difficult to exit positions (see post for details). Based on the much longer tests I’ve presented here, of the two variations, I prefer the Bollinger band one.

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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.