Using the VIX index as a trading indicator

A Stable Market is considered when the VIX index is below 20 or 25. You can use the VIX index as a trading signal by picking up trades when then VIX index goes above these levels. Historically the Vix index would reach 20 and turn back down seldom would it reach 25. By applying good money management you could take advantage of these panic situations ad buy the S&P 500 when the VIX Index rises above 20 and turns back down the next day. Historically this has worked, but as we can see for the past thing can change in the markets. Always trade with caution.

How I use the VIX

How I prefer to use the VIX index is more as a warning sign. I have strategies that i follow during normal market conditions which are simple repetitive actions everyday, but when the market conditions change and the markets become more volatile I will also change my style of trading, I would look for more spike trades. Change my trading style. i might feel maybe I should stay out of the market altogether. This depends from how volatile the markets are.

I hope this has been useful if you would like to share your point of view write a comment i will answer as soon as possible.

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Vix Index and VXN Index

The VIX is a an index of the Chicago Board Options Exchange, used to measure Market Volatility. This is a popular measure of the implied volatility of S&P 500 index options. The Vix is widely followed as it is referred to as the fear index or the fear gauge, it gauges what the market expectations are over the following 30 days. The higher the volatility, or the higher the VIX index rises the more uncertainty there is in the market of where prices are going or what will happen in the market, therefore the more irrational and volatile prices will be.
The $VIX Index measures the implied volatility of the S&P500 on the other hand there is the $VXN which measures Nasdaq 100 Index Options.

Some traders identify an inverse relationship between falling prices and the rising VIX Index. Below is a screen shot of Yahoo Finance the VIX index and the SP500. The picture below these two Diagrams I overlap the charts.

Here I overlap the two charts, you can Notice the Inverse relationship.

You can find the VIX index on Yahoo finance with this symbol: (^VIX)

The fact that this inverse relationship exists is because prices move slower up than they fall. While moving higher prices will consolidate then continue their move higher. Instead when prices fall the markets are overwhelmed by people trying to get out of stock, to safeguard their investments, because of ad news that has come out or that has spread in the markets. In the markets moving falling prices ranges are wider, thus also a bigger volatility.

You will notice that the average daily price range in a falling market is much wider that in a rising market, these bigger movements explain  the greater volatility too.

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