VIX RSI Strategy for ThinkOrSwim
Larry Connors and Cesar Alvarez talk about taking advantage of the VIX as an indicator for trading the SPY in their excellent book, “Short Term Trading Strategies that Work“. The idea is that you want to trade the SPY or SPX long when the VIX gets extended and the market is pulling back. Based on that general principle, they have developed a way to quantify these variables, and packaged these ideas together in the VIX RSI strategy. The idea is that when the VIX gets a specific overbought reading on a short term RSI setting, and the market gets a specific oversold reading on the same RSI setting, and additionally the VIX has a unique opening pattern, the historical odds greatly favor a long on the SPY.
The Authors’ Stats:
- Instrument: SPY
- Win Rate: 79.35%
- # Trades: 92
- SPX points gained: 879.46
- Avg. Holding Time: under 5 days
What You Get
- The VIX RSI strategy file for thinkorswim
- All parameters include the default settings from the authors that gave such a terrific result
- All parameters are customizable in the properties menu, including SPY sma length, RSI length, RSI overbought/oversold parameters, etc.
- Customizable market hours
- Option to use a percentage-based stop or not to use a stop
- Specify the size of stop to use, if any
- Customizable colors
Why You Want It
- The extremely high win/loss ratio on the SPY and SPX, as demonstrated by the authors, makes it an easy strategy to trade from a psychological standpoint
- Option to add a stop makes the strategy even more easy to trade
- Long-only strategy further makes it suitable for almost anyone, regardless of the type of account they trade out of
- Ability to quantitatively backtest the strategy on multiple instruments, timeframes, and conditions affords more peace of mind and encourages traders to fully trust in their system
- The ideas behind this strategy and its edge can be taken and further customized to your trading style to create a unique edge that only you know about
How it Works
The VIX RSI strategy is fairly simple to understand: the idea is we want to buy the SPY when the VIX gets overbought and additionally opens above its prior day’s close. Under the default settings, when the VIX has a reading over 90 on the RSI(2) and opens above yesterday’s close, and the market itself is currently trading above its 200 day SMA (indicating a primary uptrend), and the market itself also has an RSI(2) reading under 30, then a buy signal is issued. A sell signal is issued when the RSI(2) of the SPY closes above an overbought reading of 65.