Introducing a Volatility Filter to the QG Fund

volatility filter

volatility filterAs I discussed last week, Cesar Alvarez demonstrated that the results of the QG Fund rules could be dramatically improved by introducing a volatility filter. His backtesting results showed that limiting entries to stocks with 100-day historical volatility values below 40 would limit drawdowns and improve overall returns. The basic concept of the HV Filter is that it keeps the fund out of stocks that are more likely to suddenly crash. This give us another way to caution against walking into huge losses.

My biggest fear was that this new filter would exclude all of the IBD 50 stocks, forcing me to choose between the unknown benefits of using the IBD 50 as a stock universe and the known benefits of the new filter. However, to my surprise, more than 60% of the IBD 50 stocks have passed the HV Filter in the past two weekends. This means that we can have our cake and eat it too.

When I looked back at some of the biggest losers that the QG Fund has experienced this year, it was interesting to note that many of those losses would have been prevented by the HV Filter. The same was not true for the biggest winners, most of them would have passed the filter.

I have now made three major changes to the fund’s rules this year. I have adjusted the 3-ATR stop to a 5-ATR stop, eliminated the initial stop, and introduced the HV Filter. All of these changes were based exclusively on legitimate backtesting work that proved their effectiveness.

Another change that Cesar’s work suggests I should make is limiting the fund to a total of ten positions, instead of twenty. This sounds like a risky idea, but the backtesting supports the concept. The big appeal here is that it chops the number of trades in half, making commission drag much less of a factor. With only ten total positions, it would be possible to trade the QG Fund strategy with much less capital than would be required for 20 position sizes.

I am not going to make the change to 10 positions just yet, but it is certainly something that I will likely adjust by the end of the year.

Overall Fund Performance

The NASDAQ and the S&P 500 both dropped about 2% this past week, so the deck was definitely stacked against the DTAYS Quantitative Growth Fund. The fund started off the week pretty well, but then got hit hard later in the week. The fund is back in negative territory for the year with a total net asset value of $99,638.72. That means that the fund is currently down 0.36% on the year.

Here is what the individual holdings look like this weekend:

QG Fund Holdings

Stocks Leaving the Fund

You might have notice that the fund is light one stock this weekend. That is because SHPG crashed through it’s 5-ATR stop on Thursday, signaling a Friday morning exit. Here is what that chart looks like:


Stocks Entering the Fund

With SHPG leaving the QG Fund on Friday morning, we have room to add a new position this weekend. Despite the struggles this week, the SPY is still well above its 100-day moving average, so the new position is free to enter the fund……if we can find one…..

Not surprisingly, there is only one stock in this weekend’s IBD 50 that is sitting at a new 20-week high. That stock is VMW. It also passes the HV Filter, but with a 20-week Rate of Change of just 24.68, it falls short of our ROC filter.

Since there are no qualified options for a new position, the QG Fund will wait until next week to possibly add a 20th stock to the portfolio.