In this article i would like you to get to know the VIX Index. This is an important tool for your analysis whether you trade Forex, Binary options, or any other market. As you’ll see, i don’t recommend using this tool blindly as the only indicator for opening new trading positions. However, when you’ll get to know the VIX you will find out how important is this trading tool. It can help you to better understand market conditions and in identifying great trading opportunities.
What is the VIX Index – Eplanation.
The VIX Index is one of the most watched Index in the world. It reflects investors’ expectations about market volatility over the near term period of time. This is a reliable source, as it derived from real investors’ expectations. The VIX Index can be useful in evaluating the overall sentiment in different sectors. The main sentiment that it measures is FEAR. For that reason it also called the “Fear Index”.
Remember – The higher the fear – the higher the index – the bearish the market.
Calculation of the VIX Index.
The calculation method is built-in such a way that a reading of 30 refers to 30% per year, which is 2.5% calculated monthly, which constitute the range of the expected change for the following months. The higher the Index, the greater the volatility expectations are. This situation contains higher risks, and many investors and traders prefer to be active in solid financial assets. That also causes a rise in the speculative options prices. The same applies to the opposite situation – when the index is low, the option’s prices will go down and traders will tend to act more aggressively.
How to use the VIX Index.
In general, a high Index usually accompanied by a bear market and vice versa. Conclusions can be drawn from it to other markets. It is even possible to trade on the index itself. In times of instability the VIX Index is expected to rise. In such cases high volatility is expected and you can utilize specific trading methods that take advantage of such scenarios. (I will talk about specific strategies in future articles. Subscribe to my site to keep up to date.) The VIX can be used as an analytical tool for identifying opportunities of entry or exit signals. It also helps in identifying levels where risk is likely to rise or to fall. Historical comparison between the index and other indices shows how the index can be used profitability. For example, when the index drops, the USD /JPY pair is expected to rise, bonds to fall and the stock market to rise. Another interesting correlation you should consider is the one with commodities and metals. Gold for example, considered to be a “shelter” in time of tough economic environment. Thus, when the fear level is high the gold is likely to rise. But it’s not always the case as there are always additional factors that affects the gold or other alternative assets.
What you should do now is to start following the VIX. You will start to develop a sense regarding its behavior and how it affects the market you trade on. You’ll found out there is extremely high correlation between the VIX Index and the currency markets. So you can use it in order to strengthen analyze process and trading decisions. When you combine it in your trading strategies you will be ably to filter better signals.
Hope it’s been helpful. Let me know if you have any questions and see you soon!