Mini S&P 500: An Unusual Strategy to Survive High-Volatility Periods

by Francesco Placci

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Do you know how to use volatility to make the entries of your mean reverting strategies on the Mini S&P 500 more effective?

Usually the Mini S&P 500 responds quite well to mean reverting strategies, however in extremely high volatility phases, you might face significant losses.

In this video you’ll learn how to create a mean reverting system for this market that operates only in low volatility regimes, thus reducing the risk of significant losses related to excessive volatility.

By watching the video you’ll learn:

- How to use the True Range of bars to evaluate market volatility

- How to create the core structure of the system (which you can then personalize by inserting stop loss, take profit, etc. according to your trading style)

- The backtest of the strategy of the last 11 years

Enjoy the video!

Transcription

Hey everyone and welcome back! One of the coaches of Unger Academy here and today we’re going to give you some interesting trading tips to use with the Mini S&P 500 future in mean reverting and explain how you can survive periods like this characterized by high volatility. So, we'll show you something unusual, maybe that you’ve never used before, that can be a starting point for you to create your own trading system.

After doing a little research, I found a very particular setup on the Mini S&P 500 and I want to tell you about it today.

So the market phase we're living today is undoubtedly characterized by an increase of volatility, and usually an increase of volatility and a falling market represent a good entry point to trade the Mini S&P 500 with a mean reverting approach. The problem is that when this volatility doesn't normalize and the market continues to fall, you can experience considerable losses by using mean reverting systems. That's why we thought of trying to trade using mean reverting systems only in the presence of low volatility.

I’ve hypothesized to enter a trade only when the True Range of the previous daily bar isn't excessively extended, so in the case of a normal daily excursion.

On the contrary, when we have bars of remarkable extension as these, considered from the highest to the lowest and indeed considering the True Range, also with eventual gaps, we must avoid trading.

Now let's see what the entry setup is, which is really very simple. Here’s a day that has a narrow range. The following day we'll open a trade only if the market goes down by a percentage of the True Range itself.

The trades are then all closed at the end of the day, so it's a starter script and not a complete trading system. It’s up to you to decide, if you’re interested, to further develop it.

Let's take a look at the metrics and the equity line. I'll show them to you right now, here they are. They aren't bad at all, especially considering that the Buy & Hold, that’s the trend of the future, has shown signs of very high volatility.

Here's the interesting thing to note, is that during these phases our trading system has avoided to trade or at least it has been limited to a couple of entries and then, as the volatility increased, it avoided to open further trades.

What are the results produced by this trading system? We made a profit... Well, we would have made a profit, because, remember, this is just a sketched idea, so I never traded this system live. So, we would have earned $57,000 over a period of 11 years, with a fairly constant annual profitability.

You can see that we have a down year, 2022. We just had two stop losses so this market phase was definitely a bit more troublesome.

Let's also see what the average trade is: $118, which is a large average trade for the Mini S&P 500.

And at this point you might be thinking, "Hey show us the code! Let's see how you've been able to identify these phases of volatility compression!"

It's really very simple, it's a fairly easy setup. I made a ranking using Condition 2. "Fast percent rank" is an indicator that ranks the last observation of the True Range with the observations of N previous bars.

This ranking goes from 0 to 1. Well, I want the last observation, compared to the previous ones, to be at a value of let's say 0.4 below the average of the previous observations.

If this volatility compression occurs, then we buy. At what value? At a value of 2, which corresponds to the close of the previous bar minus a percentage of the True Range. And, finally, we’ll close trades at the end of the day.

An interesting thing is that if I reverse this trigger, requiring that the previous day was a highly volatile day, performance changes dramatically.

What we saw earlier, namely a regular equity line, turns into this type of equity line. So, it seems as if this setup can actually isolate the most profitable trades.

I've got to admit that this type of setup has surprised me a little because it's contrary to the common mean reverting operation. Usually, you must wait for a bearish trend of the market with a consequent expansion of volatility, because at a phase of expansion of volatility, usually there's a recovery of the price, and therefore a return to the mean.

Here we do exactly the opposite, so it's something that is worth studying, perhaps to build a hedging system. Because obviously if we used this same setup to go short, we could obtain a not very impressive equity line, but it could be useful in the phases when the market experiences strong drawdowns.

I'll leave it to you to analyze this approach and to add a pinch of creativity to turn this starter script into a complete trading system.

And if you are interested in systematic trading and in understanding how we trade here at Unger Academy, then well, we've got a video for you. In the description below, you’ll find a link to the video, in which Andrea Unger, our founder and the only 4-time world trading champion with real money, will explain his trading method and how he builds trading systems, and what he has learned over the years. So, do yourself a favor, don’t miss this video!

Finally, I invite you to leave us a “Like" and subscribe to our channel to stay updated on the release of all our new videos.

And with that, goodbye everyone! I look forward to seeing you in our next video!

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Francesco Placci

Hi, I'm Francesco Placci, a professional trader since 2005 thanks to the systematic approach to the markets.

My skills range from trading on index futures to bonds, from stocks to commodities, with a particular focus on volatility and options, which I consider to be among the most versatile and fascinating instruments available to traders.

After an experience with leading Italian credit institutions where I learned the basics of institutional finance, I became a successful independent trader, with great personal satisfaction.

Founder of Algoritmica.pro, in 2019 I joined Unger Academy as head of Research and Development.