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iPath S&P 500 VIX ST Futures ETN Message Board

  • chopthis777 chopthis777 Apr 26, 2011 7:10 PM Flag

    Sword for a Gun Fight - VXX may not be what you think it is

    Hi Everyone,

    Just another “attempt” to bring some additional “light” into VXX (and the market in general) as my “payment” in gratitude for those who went before me.

    Swing Trade vs. Trend Following Trade.

    Many VXX longs are tempted into VXX when they see VXX’s all time low (which has happened with alarming regularity since its inception in Jan of 2009). It is very easy for them to convince themselves that VIX is just too low and VXX can’t go any lower without going UP first. This is a valid method of trying to squeeze out excess value on underlying instrument that are pretty much range bound. This method seem to work for a mature company stock that are pretty much “range bound”. A great example of this maybe Microsoft and Walmart for last decade or so. Just buy low and sell high – in other words; buy at the support and sell at the resistance. This type of “swing” trade will beat the pants off of someone who’s simply LONG or SHORT on these stocks.

    Unfortunately VXX is NOT one of these types. VXX is a classic trending instrument (not a stock but an ETN). When one deals with a trending instrument, it is crucial to 1) identify the trend (down for VXX, obviously), 2) find a reasonable entry point (when VIX test 20 day period upper Bollinger band for example, but it doesn’t have to be that signal. One can use any entry “signal” he/she likes), and most importantly 3) stick with the trend as long as the trend is intact.

    I use the methodology of VIX futures “backwaradtion” as my filter for the 3) criterion above with a couple of additional conditions that must be met.

    Ever since I began tracking/following VXX since the early November of 2010 in real time (as well as additional 5 plus years of historical back testing), this method of trend following works the best with VXX producing consistent profits with the least amount of draw downs or paper losses. One additional trading methodology I employ is scaling entry where I don’t enter into entry no more than 20% of the overall eventual position. This money management rule isn’t necessarily set in stone but it makes me sleep better at nights so I tend to stick with it.

    Again, I see so many people trying to pick the bottom of VXX (as well as the top of the market), but often times than not, this is fool’s game. No one in the history of trading/investing has been consistent in picking tops and/or bottoms of a trend (which is different from obvious range bound moves I mentioned above).

    How do we know whether a move we are seeing is a range bound “swing” moves or a real trend? Simple, look at the long term graph. I don’t know if anyone can find a more obvious trending move than VXX for last 2 years. Maybe only other “exception” to this will be the long term dollar value since 1911 where the US dollar has lost over 99% of the purchasing power. This true definition of inflation bodes very well for the stock market in long term because the decaying value of dollar tends to push up the price of stocks (never mind the actual value of stocks!).

    Again, I understand that not many people will heed the warnings/lessons from the wise voices (I’m just passing on what I have been taught). But again, if one person can gain the benefits, I would consider that job well done. Best of wishes. Thanks.

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    • I'm reposting this thread here for those who want to follow. I believe it's very relevant to what I was trying to explain on this thread. Thanks.

      Please watch the video and read my comment about it. I think it will help you see what I'm trying to share with this "sword for a gun fight. . ." thesis. Thanks.

    • Good cautionary thoughts "chopthis". But if we are enetering one of those periods where the market swoons 10%+ in a hurry, couldn't we get a 50%+ pop in VXX (and a quintuple at least in the calls)? Think we hit $50 by end of June.

    • Chop: good article. It might help some,but I think anyone who is buying VXX is not as advanced in their method as you have stated. Some may buy as a hedge, some speculate that the market will tank and they just put their money in without thinking. Others might try to trend or swing trade this trend. If they do what you say they can make money. This is just my thoughts. Thanks for the good quality contribution. There has been a lot of ghetto trash in this neighborhood recently.

      • 1 Reply to sky777666
      • Hi Sky777666,

        Well you might be correct. But as far as I'm concerned, I did get a huge benefit of learning from others. So if it happened to me, why not to someone else is my attitude.

        I understand also that much of what I say will likely fall on deaf ears.

        It is sad that some old timers got "booted" out by all the verbal trash. . . But that's how it is - bad money driving out the good. . .


    • jermainestewartonehitwonder jermainestewartonehitwonder Apr 26, 2011 9:23 PM Flag

      Chop, this is the biggest scam of all time. Seems to be a lot of buzz out there that the VIX may spike back close to 30. That would get VXX over $30 and be a GREAT shorting chance.

    • great message chop! thanks for the post and I hope all read and react from this. but... you know how stubborn folks can be, and you have bent over backwards to explaine the truth about this etn!

      God Bless you for trying, & good luck!

      • 1 Reply to bwos2000
      • Hi bwos2000,

        Thank you for your kind words. I believe my honest effort often falls on the ears because I say the way it really is. I would never say "VXX will go down". Because that's just not true. VXX is likely continue to go down if the conditions remain the same. Now that's more like it. I see so many people saying "VXX will go up", "VIX will spike", "FED can't hold the market up" etc. etc. All these assertions are so black and white, I don't know how to respond. Is everyone else so certain of the future? Or am I so back-bone-less? Maybe a little of both.

        But no matter. I have honestly done the best I can (sure, I've made many mistakes in semantics or wordings, but I've never willingly stayed off from the truth to make it sound more "real" or "strong" than it really is). And this is a big reason why my “meat” of the message has never been changed all this time. Yes, I do sound like a broken record but sometimes (often times?) truth is that way isn’t it? Do unto others the way you wanted to be done unto you? How often does that message change. . . ?

        Hopefully, my endeavor was and/or has been enough to show my deep appreciation for those who helped me see the light. It has been a great learning experience while I was building up my daily study since last November. It is my prayer that I get to help someone else in his/her path of discovery.

        Again, I don’t know what tomorrow may hold, but I will stick with my outlook of nothing seriously changing until at least May 20th (the VIX futures/options expiration week for the May contracts). And sticking to my tradition of telling it like it is; let me be the first to tell you that I could be wrong at any time without any prior warnings.

        All just my humble 2 cents. Best of success to you and God bless.

    • Is Trend Following Method with VXX guaranteed to make profit?

      Of course not. There's no such thing as a sure thing in the market. Just because one employs trend following method with VXX to the downside, it doesn't mean he/she will end up making profit. What if he/she starts the trend following idea at the real "bottom" (which can only be confirmed in the future) of VXX? He/she will have to take the loss of course (which I too am ready to do any time). You can read my earlier posts about my willingness to take the loss if and when VIX futures show my "trend ending exit" signal. Based on my money management criterion, I won’t get in “trouble” all the way until VIX goes 80 or so and I will be getting out of my VXX short positions long time before that happens, hopefully. . .

      So when one shorts VXX with a proper entry signal, he/she must be willing to also wait for either 1) continuation of the trend to resume, hence the profit or 2) ending of the trend, hence the loss. Either case, it is a much better risk/reward strategy than going against the odds when one employs an incorrect trading/investing methodology, such as “swing trade”.

      Let's be honest. Anyone can get lucky and make money in the market. The challenge is to be consistent for the long haul. This is why it's crucial for one's long term financial well being to pick the right method for each individual underlying instrument.

      Again, all just my 2 cents as gleaned from many who went before me. Thanks.

      Oh, by the way, I’m not saying it is impossible for a person to make profit with “swing trading” VXX. I’m just saying that I haven’t met anyone who could do that in a strongly trending market/instrument in my over two decades of quite serious stock investing. I’m also sure that there are those who are far smarter than I am who can “swing trade” VXX. But for the most of traders/investors who come to this board, I doubt seriously they have that kind of skill set. I could be wrong of course. But my argument still holds: why make it harder for you that it has to be? Unless of course you enjoy the shear thrill of beating the long odds with your hard earned money. . . I don’t. I’m a chicken when it comes to investment and I would rather get good sleeps at nights.

    • Same idea written in different perspective. . .

      Again, for those of you who are looking for help to attain truth about VXX. . .

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