DIARY
Does volatility help?
Size can be read, direction can't. So what is it good for?
RESULTConclusion
- The size of moves is predictable: the correlation between the past and next 24 hours is 0.69. For direction it is -0.03, essentially zero.
- Splitting the market into three volatility regimes left every combination negative after costs.
- After sharp moves, fading lost. Following moves of 4σ or more beat random, but even 5σ made only +1.2%, and 4σ 0.0%.
- The useful part was not prediction but position sizing. Scaling a buy-and-hold by volatility reduced the worst drawdown in all 5 symbols. As the table shows, the Sharpe ratio improvement varied by symbol.
REGIMESResults by volatility regime
Before costsAfter costs
AFTER A SPIKEAfter a spike
| Condition | Trades | Win rate | Before costs | After costs | 1st half | 2nd half | Random avg |
|---|---|---|---|---|---|---|---|
| 3s follow | 6,993 | 46.8% | +2.2% | −8.9% | −11.8% | +2.8% | −11.2% |
| 3s fade | 6,993 | 49.1% | −2.2% | −13.3% | −2.3% | −11.0% | −10.5% |
| 4s follow | 3,221 | 48.4% | +4.9% | 0.0% | −3.1% | +3.1% | −5.1% |
| 4s fade | 3,221 | 48.2% | −4.9% | −9.8% | −3.0% | −6.8% | −4.4% |
| 5s follow | 1,640 | 51.6% | +3.6% | +1.2% | −0.8% | +2.0% | −2.7% |
| 5s fade | 1,640 | 46.0% | −3.6% | −6.2% | −2.2% | −4.0% | −2.0% |
| NR7 breakout (daily) | 1,943 | 41.9% | +0.2% | −2.5% | −2.2% | −0.2% | −1.7% |
POSITION SIZINGSizing a buy-and-hold
Excludes costs and swap. Annual return is simple; drawdown is on cumulative log returns.
| Symbol | Annual (fixed) | Annual (scaled) | Sharpe (fixed) | Sharpe (scaled) | Max drawdown (fixed) | Max drawdown (scaled) |
|---|---|---|---|---|---|---|
| US500 | +9.2% | +7.9% | 0.59 | 0.57 | −25.9% | −20.0% |
| USTEC | +11.4% | +12.5% | 0.54 | 0.66 | −35.5% | −26.6% |
| XAUUSD | +12.6% | +16.5% | 0.72 | 1.05 | −35.2% | −27.2% |
| BTCUSD | +9.3% | +9.8% | 0.22 | 0.23 | −110.2% | −95.1% |
| USDJPY | +5.5% | +6.8% | 0.60 | 0.71 | −16.1% | −13.9% |
This diary records tests on historical data. It does not recommend any method or symbol and does not indicate future profit or loss. Please make investment decisions at your own risk.