One of the best things about the VIPER volatility trading strategy is the ease in which it is implemented. Simply follow the signals, and the current position is either in or out. No muss, no fuss.
VIPER filters the noise
Contrary to many volatility strategies, VIPER seeks to filter out the ‘noise’ and identify a true volatility spike in the making. This is important in a few ways, and by far the most impactful is to avoid excessive trading. The harmful side effects, to borrow a healthcare analogy, are numerous. Too much trading is costly, increases the likelihood that the strategy cannot be tracked with a high degree of fidelity, creates a management task (burden is a better word) and usually dilutes returns over time.
Enter the “Disposition Effect”
The fact that trading can actually dilute/diminish returns has been shown in studies of the behavioral patterns of active retail investors. The so-called “Disposition Effect” is the act of selling profitable trades to capture the gains, while holding onto the losers in hopes of them performing a turnaround.
It is a fact of the strategy, and of life in general, that there will be headwinds to contend with. VIPER’s signals have proven historically to do a good job of informing when it is time to “step aside”. Don’t confuse short-term headwinds with impactful market events. And most importantly, leave the frequent trading to the pros when at all possible.