Wednesday, December 17, 2014

Looking for Mr. Goodbar- Part 2....12.17.14

Following up on yesterday presentation's of the M3 R model here's a look at the 6 month equity curves for M3 and M3R. The R version is clearly more volatile since no stops are used but what we're seeing is a result of putting faith in the model's (R version) ability to correctly forecast the next day's bullish or bearish bias while disregarding the consequences of error.  This is the real cost of risk....,
If we turn off all the stops in M3 (not shown) the equity curve would get quite hairy since the volatility issues XIV and VXX are part of the mix and 6-9 % daily swings in net gain or loss will be considerably more than in the R model.