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Friday, March 20, 2015

Trading the $VIX

This blog on trading the $VIX was most recently updated [9/17/2022]

Trading the $VIX

A better title for this blog may have been, "Guide to using the $VIX", because I don't recommend actually trading it, but rather using it as a guide, to help keep you stay 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 perhaps even a devoted chart view or 2, during times of high volatility. I personally have probably 100 $VIX charts, including leveraged ETF which trade with, or against the $VIX.    

Charting the $VIX take some practice, and I can honestly say, after many years, I am the foremost authority on reading the $VIX. Today, in 2022, you see every traders trying to do, what I started doing nearly a decade ago, and the experience shows.  

The $VIX is a sentiment indicator, and once it peaks out - in a market crash - it tends to reverse violently. Leveraged (VIX) ETFs, in a major sentiment reversal, may give back as much as 50% in a day!

Charting The $VIX 

 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. A $VIX of 20 is considered high, and keeps investors on edge, and in a defensive mode. 

At the time of the most recent update to this guide (2022, the $VIX continues to trade above 20, nearly 2 years after the covid scare. This is unheard of!   

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, on a daily basis. 

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 short the $VIX in early 2018, as the manipulators were wiped out in 1 day, as I explained in my live interview on F.A.C.E.

Sorry, I have to cut this article short, but I want to leave something for the book, I have planned.

Good luck, 

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