As we have done with the Euro fuel gauge we shall look at a simple application of the Yen gauge as a filter to go long and short the Yen. We have seen how it is relatively common to get readings above 90 and below 10. This means we can use an aggressive threshold as a filter.
- Buy the Yen if the filter rises above 70
- Sell the long position if the gauge falls below 60
- Sell Short the Yen if the gauge falls below 30
- Cover the short if the gauge rises above 40
- There are no stops, addons or profit targets
I want to use a lower threshold to exit so that the position has a chance to work even if the very first move above the threshold doesn’t work. How has this done since ’08?
There is a poor performance period in 2008 but in defense of the index, we should presumably have recognized the rather extreme set of volatility conditions and used them as an additional filter or shut down the gauge until things became more normal.
Here’s what some trades look like alongside the gauge.
The other weak performance period was in mid 2014 where this system didn’t make any money. Let’s look at a chart of the period:
The trades were not really that bad. The problem was that the market itself wasn’t going anywhere -this was a very narrow range for about 9 months (from Feb to Sept 2014). We can’t expect to make a lot of money under such conditions. It would reasonable to introduce a short volatility position when the index is in neutral – somewhere between 40 and 60.
On the whole the filter does extremely well and will serve as a good filter to use with your existing indicators or investment process.