Trading Strategies / R2 systems

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VIX Predicting The Future...And It's Cloudy
premium or discount that the front-month VIX futures vs. cash index
- http://sentimentrader.blogspot.com/2009/07/vix-predicting-futureand-its-cloudy.html

asr note: we need to develop this kind of Premium diffs for CALL/PUTS for OIL to see where OIL (WTI, CL) is headed next.
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quantifiableedges
It has all great TradeStation studies ..
http://www.quantifiableedges.com/
asr: this has good tradestation code for external data like employment numbers, what happens before and after employment numbers release , Michigan index, price index etc ..

Quantifiable Edges Market Studies
http://www.quantifiableedges.com/studies.html

2 days in chop system
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Wow this FED meeting day study is only $20 for TS code , great we can use this kind of TS code setup for " Employment number RElease "
Last night I looked at all times since 1982 the S&P 500 rose 1% or more on a Fed day and closed at a 10-day high:

asr note: In this case we can sell CALLS on this FED day strength, similarly we for OUR VP based sytesm if we get triple moving avg. if we get profit factor as 5 then we can SELL PUTS/CALLS as applicable case .

The edge isn’t as prevalent initially, but over the next 2 weeks a downside tendency can be observed. Not shown above is that 70% of all instances closed below the close of the Fed day within the next 3 days. While this isn’t one of the strongest edges we’ve seen, it does suggest a pullback is the odds-on play. I also thought it was worth adding to the Fed Day Studies.
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Trading with RSI(2)


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http://store.tradingmarkets.com/books/stocks/high-probability-etf-trading-7-quantified-strategies.html?utm_source=TMH_TL_E&utm_medium=TM&utm_campaign=TMH_TL_E


this is $4k system they are talking about
http://store.tradingmarkets.com/courses/stocks/the-tradingmarkets-swing-trading-college-summer-2009.html


Here is other desc.
http://www.friendlytraders.com/forum/archive/index.php/t-2568.html

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so this trading markets guys are releasing this Yahoo news once in 15 days see these 3 below
asr: it seems they used this RSI(2) to issue overbought ( >75) , oversold ( < 20 )
. any way the ETF book seems give these strategies in detail ..

9/14/09 (for this date): TradingMarkets Most Overbought and Oversold ETFs for Monday
http://finance.yahoo.com/news/TradingMarkets-Most-tm-3301171220.html?x=0&.v=2

for 9/8/09 ( given 2 day weekend before) : this worked seeing USO chart or 9/8
http://finance.yahoo.com/news/TradingMarkets-Most-tm-1537133522.html?x=0&.v=1

8/25/09: TradingMarkets Most Overbought and Oversold ETFs for Wednesday
http://finance.yahoo.com/news/TradingMarkets-Most-tm-2152669471.html?x=0&.v=1
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High Probability ETF Trading: 7 Professional Strategies To Improve Your ETF Trading (Hardcover)
review:
There are indicators that these strategies employ are all readily available through standard chart packages. All the rules are black and white with no subjective judgment required. If you trade ETFs are planning to in the future, all I can say is that you must own this book.



seeking alpha review
Each strategy uses one main metric and this means that each strategy is relatively simple to execute and can be backtested without complicated programming. This is another thing I like about the book.

One reservation I have is the fact that all the seven strategies rely on mean-reversion; that is, entering on pullbacks, not breakouts. In strongly trending markets the strategies are likely to suffer, or not do as well.

Some assets have a greater tendency to trend than others but all asset prices go through periods of mean-reversion and trending.

A second reservation is that stops are not used in any of the strategies because, according to the authors,

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The Improved R2 Strategy: 84% Correct with Just 6 Rules

Here are the simulated results from Jan 1, 1995 to December 31, 2006:

Number of trades: 102
Percent correct: 84.31%
Total S&P points gained: 1013.90
Average holding period/trade: 5.76 days

asr note: 1/ so for 10 years, it executed 100 trades that is 10 trades/year => 1 trade/month
2/ this low frequency is OK given it's success rate is 85% and it returned 10 (Emini ES) points per trade that is 10 x 50 = $500/month per 1 contract.
3/ if you back test this and works fine, you can add some exit criteria or Profit traget to improve results?
4/ LOW frequency that is "one trade/month" is OK, you can apply this some other unrealted markets like commodities or currencies and see if those give same results of 85% correct , then by mix. of multiple markets you can have 4 trades/month that is 1 trade/week .
5/ once the rule is coded in trade station( or multichart) you can test this on USO Oil, UNG natural gas , FXE euro etc.. and some stock sector ETFs
http://www.investopedia.com/articles/forex/07/currency-ETFs.asp
6/ we can use this as one of the signal along with VP

7/ we can get multiple market back test data HERE and each Strategy

this link shows 7 stragetgies and and their return and one Stragegy applied to all ETFs
http://store.tradingmarkets.com/books/stocks/high-probability-etf-trading-7-quantified-strategies.html

In early 2005, we published the R2 Strategy on TradingMarkets which quickly became one of our more popular strategies. The strategy was also presented at "The Traders Expo" in Fort Lauderdale last year. In the "MoneyShow.com Best Webcasts of 2006" it was voted the number one presentation in the "Best for Traders" category. We recently updated and improved our research, leading to this article that shares
our latest findings with you.

What is the Improved R2 Strategy?

The Improved R2 Strategy is a simple six-rule Market Timing Strategy which uses the 2-period RSI as its primary tool. Our research has shown that there is little statistical evidence using the standard 14-period RSI. But, when you shorten the period to a 2-, 3- or 4-period RSI, test results significantly improve. By using the 2-period RSI as we do here, you can see back-tested results of 84.31% correct in the S&P 500 Index going back to 1995 (12 years).

Here are the Rules:

1. The SPX is above its 200-day simple moving average (you can use any S&P 500 derivative product, including the SPYs, E-minis, etc).

2. Day 1 - the 2-period RSI is below 65. This tells us that the market is in a neutral to possibly oversold condition.

3. Day 2 - the 2-period RSI closes lower than Day 1.

4. Day 3 - the 2-period RSI closes lower than Day 2.

5. Buy the market (SPX, SPY, E-mini, etc) on the close Day 3.

6. Exit when the 2-period RSI closes above 75.



Here are some recent trade examples using the Improved R2 Strategy to trade the SPY. In each example, the SPY is trading well above the 200-day simple moving average (rule 1) and therefore not shown.

1. The SPX is above its 200-day simple moving average (not shown).
2. Day 1 - the 2-period RSI is below 65. On 02/08/07 the 2-period RSI is 59.80.
3. Day 2 - the 2-period RSI closes lower than Day 1. On 02/09/07 the 2-period RSI is 9.73.
4. Day 3 - the 2-period RSI closes lower than Day 2. On 02/12/07 the 2-period RSI is 5.80.
5. Buy the market on the close Day 3. On 02/12/07 buy SPY at 143.50.
6. Exit when the 2-period RSI closes above 75. On 02/14/07 sell SPY at 145.78.

1. The SPX is above its 200-day simple moving average (not shown).
2. Day 1 - the 2-period RSI is below 65. On 01/25/07 the 2-period RSI is 29.15.
3. Day 2 - the 2-period RSI closes lower than Day 1. On 01/26/07 the 2-period RSI is 25.37.
4. Day 3 - the 2-period RSI closes lower than Day 2. On 01/29/07 the 2-period RSI is 20.15.
5. Buy the market on the close Day 3. On 01/29/07 buy SPY at 141.95.
6. Exit when the 2-period RSI closes above 75. On 01/31/07 sell SPY at 143.75.

1. The SPX is above its 200-day simple moving average (not shown).
2. Day 1 - the 2-period RSI is below 65. On 12/20/06 the 2-period RSI is 44.46.
3. Day 2 - the 2-period RSI closes lower than Day 1. On 12/21/06 the 2-period RSI is 14.45.
4. Day 3 - the 2-period RSI closes lower than Day 2. On 12/22/06 the 2-period RSI is 4.43.
5. Buy the market on the close Day 3. On 12/22/06 buy SPY at 140.75.
6. Exit when the 2-period RSI closes above 75. On 12/27/06 sell SPY at 142.51.

Applying this Research and Strategy to your Trading

You can immediately begin applying the Improved R2 Strategy to your trading using the rules above. If you wish to attend a free live class presented by Larry Connors, CEO and Founder of TradingMarkets.com and Connors Research, click here.

We have often been asked if the R2 strategy is transferable to stock trading, and the answer is yes. We have created simulated portfolios using a variation of the R2 strategy (known as the R3/R4 strategy). If you would like more information on the R3/R4 Strategy, click here.

Summary

As you can see from the above results, the Improved R2 strategy has done an excellent job of identifying buying opportunities in the market going back more than a decade. And, it’s a simple indicator that you can apply immediately. If you have any questions on the research or the strategy please feel free to email us at editor@tradingmarkets.com or call us at 213-955-58585 ext 1.

Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.

Ashton Dorkins is Editor-in-Chief of TradingMarkets.com.
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High Probability ETF Trading: Choosing the Best ETFs to Trade

One of the questions I often get is how I choose ETFs
in my Daily Battle Plan when there are too many set-ups in a day.

For example, there are 61 liquid 1x ETFs that qualified as buys last night. Which ones do you choose? One way is a portfolio method that space doesn't allow for us to look at here. However, some simple guidelines for you to follow though are:

Historical Volatility: The higher the better.

Country Funds versus Sector Funds: I prefer Country Funds over the Sector Funds.

Multiple Country Funds triggering at the same time: Start with the major U.S. indices first before moving abroad.

These are good guidelines backed by statistical results going back to 1993. I'll be covering this selection and portfolio process in greater depth during our Fall 2009 Swing Trading College which begins next month.



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Test Results from 1995 to 2007

The 2008 VIX Trading Strategies Report teaches you five separate quantified strategies; four of which have been profitable more than 80% of the time in predicting the short-term direction of the S&P 500 since 1995. VIX Strategy is so strong that it has achieved nearly 100% of the gains in the S&P while only being in the market less than 16% of the time.

asr: see other courses at the bottom

Market Timing Using The VIX

The following was transcribed and edited from TraderTalk, a free, live, interactive workshop conducted for TradingMarkets members by Larry Connors.

What Is The VIX?

In my opinion, the VIX is the best market-timing indicator available for short-term traders today. The VIX is, simply, a measurement of the implied volatility of the at-the-money OEX Index Options. High VIX readings usually occur after markets experience sharp sell-offs, when fear is rampant and sharp reversals to the upside tend to occur. Low VIX readings (as we are seeing now) usually occur when the market rises. This is a signal that there is complacency in the market and a sell-off is near.

Why Does The VIX Work?

These four rules will help you understand why VIX signals work:

1. All volatility is mean-reverting. This simply means that periods of low volatility will be followed by periods of high volatility, and vice versa. The academic world proved this nearly 50 years ago, and it's one of the few truisms of market behavior. The reason this is important is that when the VIX has a high reading and begins to revert to its mean, it's also accompanied by a market that begins to rally. Same thing for low VIX readings -- when it begins reverting to its mean, many times it's accompanied by market sell-offs. Keep that in mind whenever you're looking at a VIX chart in the future.

2. Volatility is auto-correlated. That means if the VIX rises today, it has a better-than-even chance of rising tomorrow. This is most significant at market extremes and right before reversals.

3. This is the one that gets most traders on Wall Street messed up (and if you only learn one thing from this session, this is the most important): The VIX is dynamic, not static. Simply saying that you buy the market when the VIX goes above 30, and sell the market when it trades around 20, is sheer B.S. The Press over the past couple of years has done a wonderful job of engraining this into traders' heads, but nothing could be further from the truth. Blindly entering the market because the VIX reaches some pre-determined level will eventually get you killed.

4. As mentioned before, the VIX measures fear. High VIX means that fear is high, low VIX readings mean that fear is low. History has proven (and the CVR signals have statistically proven) that approximately two out of three times, when these market expectations occur, a top or bottom is in place and we're going to look to fade these expectations as we know we will be right approximately 65% of the time.

CVR Signals

I will now teach you two of my 10 CVR strategies. Both of these strategies can be found nightly on our Market Bias page. Also, all the strategies can be found in my book Trading Connors' VIX Reversals and in my nightly service. (Why do I feel like Landry right now, shamelessly plugging my stuff?)

The 10 CVR signals as a whole over the past nine years have correctly predicted two- to three-day market direction for the S&Ps approximately 65% of the time. The CVR 3 and the CVR 7 have correctly predicted direction nearly 70%. First, let's look at the CVR 1 signal, which is the most basic of signals, and then we'll look at the CVR 3, which is one of my favorites.

CVR 1 Signal

The rules for the CVR 1 are simple: For market buys, we are looking for the VIX to make a 5-day high and close under its open. For sells, we are looking for the VIX to make a 5-day low and close above its open.

Let's talk conceptually about what is going on here. First, a 5-day high or low for the VIX tells us that the market on a short-term basis may be reaching some extreme. By waiting for it (for buy signals) to make a 5-day high and then at the same time closing below its open (remember rule #2: Volatility is auto-correlated), we are finding a market that may be experiencing a sentiment extreme and has a higher-than-average probability of reversing for the next two to three days.

Take a look at some of the CVR 1 buy signals that occurred during the month of December and helped us open up this year. As you can see, it did a good job of identifying swing lows throughout the month.

The CVR 1 correctly predicts market direction approximately 59% of the time (one of the lowest of all the CVR signals), but more importantly, I'm showing it to you for two reasons: one, for educational purposes to get you to better understand conceptually what is happening, and two, because the CVR 1 signal, when it's combined with the CVR 3 signal (and many other signals) tends to increase the percentage of the time that the signal is correct.

CVR 3 Signal

Now, let's move on to the CVR 3 signal and then we'll talk about entry and exit. My CVR 3 signal was co-created with Dave Landry. What we found is that when the VIX moved 10% away from its 10-day moving average, it identified a market that had been "stretched too far" and was likely to reverse. In fact, over the last nine years, it has correctly predicted a two- to three-day reversal better than 68% of the time.

The rules for the CVR 3 are as follows:

For Buys:

1. Today, the low of the VIX must be above its 10-day moving average.
2. Today, the VIX must close at least 10% above its 10-day moving average.
3. If rules 1 and 2 are met, buy the market on the close.
4. Exit (on the close) the day the VIX trades (intraday) below yesterday's 10-day moving average (reversion to the man). Or exit within two to four days.

For Sells:

1. Today, the high of the VIX must be below its 10-day moving average.
2. Today, the VIX must close at least 10% below its 10-day moving average.
3. If rules 1 and 2 are met, sell on the close.
4. Exit (on the close) the day the VIX trades (intraday) above yesterday's 10-day moving average (reversion to the mean). Or exit within two to four days.

Again, let's look at this conceptually. For the VIX to move 10% away from its moving average, the market must have gone through some extreme one-way move. As we all know, the short-term moves are nearly always unsustainable, and the best reversals come from them. We have found that the best way to measure these extremes is with the CVR 3. On average, a CVR 3 signal occurs about once every two and a half weeks, and we look to exit within a two- to four-day period of time.

Multiple Signals

Before talking about which markets to trade and entry and exit, I want to cover one more thing. The CVR signals perform even better when you have multiple signals all pointed in the same direction. If you take the signals from our Market Bias page, you'll want to see at least two CVR signals pointing in the same direction. If you take the signals from my trading service, the ideal time is to wait for three or more signals pointing in the same direction.

Many traders have their own market-timing methods, some which are quite good. CVR signals combined with other internal signals will give further confirmation that those signals have an edge, and increases the odds that your trade will be successful.

Money Management

One caveat: No matter how sure you are that the market is going to move in one direction, you need to use protective stops and proper position size to manage the position. Even if you have a methodology that's right 70% of the time, it's more important to remember that it's wrong 30% of the time. The gains take care of themselves, it's how you manage that 30% wrong that will ultimately decide how successful you are with your trading.

Vehicles And Entries

Now let's talk about which markets to trade and how to enter positions. The majority of my testing (and real-world results) with the CVR signals have been with the S&P futures. This means that the best way to replicate the results is to trade S&P futures (E-minis) or SPDRs. For the S&P futures, had you traded one contract for every CVR signal since 1993, you would have earned approximately $1.8 million since this past summer. THERE IS NO GUARANTEE THIS WILL HAPPEN AGAIN. But this should give you an idea of the cumulative effects of the CVR signals from 1993 up until recently.

With the SPDRs, you'll essentially be looking at the same results (percentage-wise).

Alternative Markets

For those of you who don't want to trade SPDRs or trade S&P futures, you should look at the Market Bias page and the CVR signals to guide you as to what the likely market direction will be for the next couple of days for the market. One of the things we have continuously preached on the site from Day 1 (in spite of the fact that it wasn't in vogue in 1999) was that we need to trade both sides of the market to fully take advantage of them. Too many methodologies out there are "bull-market-only" methodologies (or "bear-market-only") and all these guys got killed when the market turned on them. If you're not trading both sides of the market, you should strongly consider doing so. Dave Landry (there's that name again) wrote an excellent article on how to short stocks. Also, one of the advantages of trading SPDRs is that they do not require an up-tick so you can short them immediately, without worrying about violating the up-tick rule.

CVR Signals And Options

Probably the biggest edge with the VIX signals occurs in the options market, and I'll be the first to say after trading the CVR signals for nearly six years, I haven't come anywhere close to taking advantage of this edge. With that said, again let's talk about what's going on with the CVR signals, conceptually. For example, when a CVR buy signal occurs, and it is correct, it is correctly predicting price direction and volatility direction at the same time. It really doesn't get much better than this for option traders. There are multiple strategies to take advantage of such signals, ranging from selling naked puts (not advised, but certainly gives you the biggest edge) to trading verticals.

Let's take this one step further: By selling premium on a CVR buy signal, you will have price exploding on the underlying (which means your short premium is imploding in your favor), and you have volatility imploding which is causing further good erosion on your short position. Plus, because these signals are two to four days in nature, you also have theta (time) working in your favor. Again, it doesn't get much better than this.

Let's go to a CVR sell signal. The correct strategy here is to be long put premium. The reason is that when the signal is correct, price will move in your favor, increasing the value of your put, plus volatility is also moving in your favor, increasing the value of your put.

As with all these strategies, you want to be in the market approximately two to four days, and you'll want to make sure you use the correct stops to protect yourself when the signals are wrong. As far as the perfect strategy to trade with this, that is 100% up to you, you're the only one who knows what's best, based upon your trading style and risk tolerance.

Q&A

Here are some of TradingMarkets members' most frequently asked questions on the use of the VIX and CVR signals:

Q: Do the VIX rules apply to the VXN and QQQ?

A: I have never really done extensive testing on the VXN. My initial testing (and my instincts) say that the rules work the same, and there should be some sort of edge there. I would prefer testing this for at least a five-year period of time before committing to this any further, but there should be an edge here.

Q: What percentage of the time do multiple signals occur?

A: Multiple signals occur more often than you think. On average, when our Market Bias page has one signal pointing in one direction, about half the time it will have another one pointing in the same direction. And to reiterate what I said earlier, the multiple signals do increase the chances of success with the trade.

Q: What about the recent low VIX and VXN levels?

A: As some of you may know from reading my weekly column or being a subscriber to my service, the VIX has now spent a good part of the past two months under its 20-day moving average. The same goes for the VXN. This by itself is not a signal that the market is going to sell-off immediately, but it does give you a good heads-up that there is a great deal of complacency in this market.

Another example of this complacency was Monday night's action in the VIX. Even though the S&Ps lost nearly 10 points for the day, the VIX barely budged, and in fact, closed near a four-month low. Both VIX actions combined were telling you loud and clear that the complacency out there is at an extreme, and certainly today's rapid, sharp sell-off occurs over and over again when these extremes get reached. This is not a 2002 event or a recent market event; this type of behavior has been exhibited by the marketplace for decades, and will continue to occur for decades to come.

Q: What about conflicting signals, meaning one CVR signal is pointing up and one CVR signal is pointing down?

A: The answer is simple: PASS THE TRADE. There is no edge here.

Q: When are the signals on the site updated?

A: For those of you who are TradersWire Interactive subscribers, Greg Che comes on the Wire a few minutes before the close and gives you the signals that look like they will likely trigger at the close. On the TradingMarkets site and on my subscription service, the signals are updated nightly at approximately 7:30 p.m. EST.

Q: What if the CVR signals conflict with the other Market Bias indicators?

A: If one CVR signal conflicts with another CVR signal, you'll want to pass on the signal. Again, there is no edge. If a CVR signal conflicts with a TRIN thrust signal, or the momentum index indicator, the CVR signals override those signals, and the CVR signals should be taken.

Q: What about specific entry triggers and stops?

A: There are two ways to do this:

1. You can anticipate the CVR signals occurring and enter the market intraday. This would be especially true by placing stops at some level away from the market which will only get triggered if the market strongly reverses intraday. This will many times give you a head start to the signals (but is far riskier than a mechanical market on close entry when you know the signals will be there for sure).
2. Simply to wait for the signal to occur, and then enter either on the futures at the close, or for stocks, on the market opening the next day.

Another aspect to consider is the exit strategy. In my book Trading Connors VIX Reversals, we show two- and three-day mechanical exits, and the results speak for themselves. For many traders, this works fine; for me it does not. I'm much too hands-on. I need to be moving my stops and adjusting my positions appropriately when I can. Again, this is a personal choice. The most important thing is to use the CVR signals to gain an edge, and then take advantage of that edge.