Interestingly, if nosotros bought SPX when the five-day moving of VIX was less than 15, the side yesteryear side v days inwards SPX averaged a loss of -.04%. That would accept resulted inwards a cumulative loss of -3.42% during a menses inwards which the marketplace rose yesteryear most 47%!
Conversely, if nosotros bought SPX when the five-day moving average of VIX was greater than 15, the side yesteryear side v days inwards SPX averaged a gain of +.52%. That would accept resulted inwards a cumulative gain of nearly 41%, versus the buy-and-hold of 47%. In other words, the vast bulk of the market's gains accept occurred during periods of elevated short-term volatility.
My indicate hither is non to propose a trading system, though it's non hard to conceptualize i from the consider of relative volatility spikes. Rather, the indicate is that comfortable markets--those amongst pocket-size volatility--have yielded negative returns. Uncomfortable markets accept yielded the volume of marketplace returns.
A trader's returns accept been straight proportional to his or her ratio of courage to fear. Buying ugly markets has made superior returns; stopping out of long positions on ugliness has led to negative timing alpha. Buying stocks when fright is gone together with markets are orderly has non paid off.
If there's a formula for trading success, prudent courage is non a bad start. If there's a formula for trading failure, acting on fear--fear of missing out, fright of losses--is likewise non a bad start. It's amazing how ramping upwards trading risk/size together with trading frequency tin plow prudently courageous traders into fearful ones. If there's a formula for risk-taking, trading the largest size that enables you lot to rest prudently courageous during times of ugliness is a expert starting point.
Further Reading: Why Success Lies on the Other Side of Fear
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