Volatility Regime:
For this test, my definition of volatility regime and classification is as follows - Calculate the 50 day historical volatility of the underlying market. Then calculate the percentile rank of historical volatility for today in relation to last 20 days volatility. Then place current day volatility rank into one of the four buckets - (0-25), (25-50), (50-75) and (75-100).
Range 0-25 is the lowest volatility bucket, 75-100 is the highest volatility bucket and rest in between. There is nothing special about dividing the volatility range into 4 quarters. We could have as well classified into 3 parts or as 5 parts.
Test:
The test details are same as described in the first post except for one extra condition i.e., take trade only if today's volatility rank is in (0-25) bucket (for calendar strategy test in low volatility regime). Same for others volatility ranges. Same caveats as in prior posts apply here.
Results discussion:
I have intentionally left discussion of results in this and prior posts. My thinking was it is more fruitful for everyone to see the raw data, derive own conclusions and share with me & other readers your thoughts in either comments/LinkedIn discussion threads of this blog. That way I also gain new insights and learn something from you on these studies/concepts strength and weaknesses.
On surface, the drawdown numbers of these studies appear quite high. So it is natural to write off and move on to something else. Unlike other studies, I am developing this strategy as I go along. So I don't know yet the direction this series takes or what the final numbers look like. But I think pursuing the concept is still promising for following reasons.
The strategy shows consistently positive edge (see this and last 2 studies) during certain days of the month for last 40 years. And the positive edge shows up on days different from conventional wisdom regarding End of Month strategies. For things related to market, I generally like stuff that either majority ignores or goes against their understanding. Also at this stage we are just assessing whether the concept has positive edge or not with a dumb entry & exit tactic. There are several things one can do to reduce max drawdown significantly by the time strategy reaches final stages like fine tuning of entry tactics based on price action/stop losses/dynamic exit tactics/equity curve based money management/position sizing based on regime/volatility etc.
Third reason is the correlation of this to other methods. I have not yet done study but conceptually it appears to me this strategy results will likely have low correlation to other timing approaches and to SP500 returns. That makes the strategy pretty potent.For an idea, see the strategy diversification study (posted on blog couple weeks back) and the performance graphs (cumulative returns, max DD etc) of individual systems and combined portfolio. See also time diversification study.
Readers
I look forward to hear your thoughts and suggestions. We learn most when our views differ. So feel free to share your thoughts and more so if your views are opposite to above or on aspects not covered by above post.
Wish you all good health and good trading!
(Correction: Sept-04-2012...Updated the post with correct results image)
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