Friday, March 20, 2015

Trading the $VIX

This blog on trading the $VIX was most recently updated [4/24/2018]

Trading the $VIX

A better title for this blog may have been, "Trading of the $VIX", because I don't recomend actually trading it, but rather using it as a guide, to help keep you on the right side of the trade. 

The $VIX is our #1 fear indicator. High $VIX = fear. Low $VIX = no fear (in the market). Pretty simple.

An oversold ($VIX) can be seen as complacency, and greed, which is bearish, and raises red flags to experienced traders, but usually a low $VIX only means that there's little fear in the market, and this is a good thing.

Exceptions: There are times when the market can continue to rally, despite a gentle rise in volatility (which is what the $VIX technically measures), but that's rare. 99% of the time, the $VIX is going to trade opposite the broader market.

A $VIX that breaks out above resistance, and continues to pop higher, always points to a risk off environment, and a rising $VIX should never be ignored. In fact it deserves a place in your tickers, and even a whole screen, durring times of high volatility.   

Charting the $VIX take some practice, and I can honestly say, after many years, I'm still learning... the $VIX trades like a sentiment indicator, so once it peaks out, it tends to reverse violently. Leveraged funds also trade like this, after a major reversal, giving back as much as 50% in a day. The best advice I can give you, on charting the $VIX, is to use trend lines, and watch certain universally accepted resistance levels like $VIX 20.

Without the $VIX it would be near impossible to determine market sentiment in real time, and if there's one thing I've learned over the past few years it's that what is important above all else is consistency.

The $VIX is technically a measure of market volatility, and volatility works both ways. At $VIX 10 the market hardly moves, while at $VIX 90 the market may swing 10%, or more, in only a few hours.

There are various ways to trade the $VIX, but I don't actually recommend trading the $VIX, and you can see what happened to traders, who were using the leveraged inverse fund to shorting the $VXY in early 2018, as the manipulators were wiped out in 1 day, as I explained in my most recent live interview on F.A.C.E.

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