In the past year I have been pretty mum about evil.rat. Reason was that after about April 2009 it started to trade pretty much sideways. It lost some – it won some – and the net effect was a year of sideways action. After a few months of looking at this it became clear that something had obviously changed.
Now, if you know anything about yours truly then you know that I don’t give up easily – when it comes to charting and trading strategies I’m a bit like puppy with a Frisbee. I was hell bent on figuring out the underlying reason for evil.rat’s fall from grace, and I did have a theory which I shared with a few faithful subscribers. At some point a few months down the line something had occurred to me when I was looking at evil.rat’s profit graph – it seemed resembled the VIX chart but in an inverse fashion. And the magic cut off point between juicy profits and sideways frustration appeared to be the 30 mark on Mr. VIX.
Of course I couldn’t just come out and throw this out as a theory – I needed proof. Which simply refused to be forthcoming. For months Mr. VIX descended lower and lower and as we dropped below the 20 mark it also seemed that evil.rat was deteriorating. Frankly, at that point I was close to kicking it to the curb as some trading strategies simply work for a few months, maybe years, but then somehow stop. Fortunately I kept it running until the VIX suddenly spiked higher.
And yes, suddenly evil.rat snapped back into action, almost immediately. The past three months have been very profitable and it appears to prove my theory: evil.rat is a high volatilty stategy – it needs the swings and it eats volatility for breakfast. The cut off point for evil.rat appears to be the 30 mark (which we keep retesting right now). It also does seem to like sudden spikes in volatility below the 30 mark but obviously that is impossible to predict.
The chart above shows the correlation quite distinctly, IMNSHO. The blue line is evil.rat’s profit line and the black line is the VIX. Notice how evil.rat responds almost immediately to any increase in volatility and keeps producing as long as the reading remains above the 30 mark.
So, this is what I’m planning on doing. Quite simply I am going to add a ‘sub25VIX’ filter in my evil.rat code – which prevents evil.rat from triggering as long at Mr. VIX is below the 25 mark. I am picking the 25 mark as the odds for good trades increases quite a bit above that point (see the chart above).
Now, I’m NOT saying that you guys should all run and sign up. But I wanted to bring this to your attention as I think that the new evidence supports my theory. And I will keep reporting about it in the coming weeks – especially if Mr. VIX decides to start climbing again.
UPDATE 3:52pm EDT: I actually went to work after posting this and implemented the new rule – then ran it through the optimizer. I now am using a 15-day SMA on the VIX. The setting actually tested out at 30 and this is the result – same evil.rat settings we’ve been running for over a year now, just with the VIX rule added:
Profit curve since September of 2008. Pretty sweet! This version is going to run starting Monday. The way I’m going to handle subscriptions will be like this: If evil.rat does not trigger within the period of a subscribers’ month then he/she can request a free month. This way you won’t wind up paying without getting a signal. I hope this system will work for everyone.
Have a great weekend!