Tuesday, August 07, 2018

Volatility and Return

The graph shows the average true range (ATR) divided by the closing NQ futures price for all 14 day periods in 2018 so far and the average daily NDX model return over the same period. The correlation is very strong. The model tends to make lots of money when the market is volatile and potentially lose money when the markets are not volatile. This is why the model would have lost money in early 2017 for example and probably why the NASDAQ index produces better results than the S&P 500. Clearly, noise dominates signal when volatility is low. However, the correlation between recent volatility and future returns is quite weak. So, this isn't yet a useful tool for deciding when to trade and when not to trade on a daily or weekly basis. But if you were losing money for a while and volatility was low it would make sense to get out of that market and trade something else until volatility appeared to return.

I'm still holding the strategic long contract. It's up around $4k at the moment. I did a couple of tactical trades netting $215 and $980.

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