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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Trading example of the Aroon Indicator on BHP Billiton LTD

Here is a spread betting example using the Aroon Indicator on BHP Billiton. The Aroon indicator is more of a confirmation tool than an entry and exit tool, as it lags the change of Direction.  It has a similar  behavior to a moving average. Moving averages only tell you that the market has turned, after it has turned. On the other hand the advantage of a lagging indicator is that if a trend pics up it is the best tool to keep you in the trend even if short term retracements arise in the main trend.

Period 14: Having said that lets return to our example. In the Aroon Indicator I have applied this on BHP Billiton, a mining company. I have used the default settings that are given by the graph, that is a period of 14 days. The higher the period, the longer it will keep you in the trend but at the same time the later you will enter the trend.

Trade Short when the Aroon Indicator crosses and turns Red.

Trade Long when the Aroon Indicator crosses and turns Blue.

Pay attention you always want to see one of the Aroon indicator’s leg’s above the 70 line or below the 30. If both are in the middle, or between the 30 and 70 line, this is telling you that there is a lack of direction. Should stay out if your strategy is following the trend.

As you can see from the graph, where the indicator crosses downwards, changing the highlighted colour to red, this indicates a short trend is under way. You can see this highlighted by the first down arrow. As you can see, at this point the trend in BHP Billiton has already reversed and and the Aroon indicator has signalled it slightly late.

On the second up arrow indicates a long trend is underway. You can identify this by the Indicator turning blue in this spread betting example.

Instead where you see the red cross. The Indicator gives no direction as the lines narrow between the 70 and 30 mark.

The Aroon Indicator is a very helpful tool as it tells you in which Market you are trading and which tools to apply, trend following tools like the Moving averages or oscillators.

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Spread betting example

How to trade the Aroon Indicator

http://www.onlinetradingconcepts.com/TechnicalAnalysis/Aroon2.html

third post  – spread betting example trading BHP Billiton

02-agosto-2012to do connect the two pages created in the main index link oscillators and moving averages

Basic strategy using the Aroon Indicator

Many have emailed me and asked what was the Aroon Indicator in their IGIndex accounts, here is a simple explanation of the Aroon indicator and presented in a simple strategy.

The main function of the Aroon indicator is used to know when the market is in an upward or downward trend, or simply ranging. It is helpful to also define which strategy is right for the current market conditions.  Simply put, many strategies loose money in non-trending conditions, thus knowing (or at least having an indicator that informs you) when the market is trending or not can save many spread betters a lot of money.

Below is a spread betting chart of BHP Billiton, using the Aroon Indicator. This is an hourly chart taken over the last two weeks. In the chart I show how the Aroon Indicator was able to capture one full week of downtrend and one full week of uptrend:

How to Interpret the Aroon Indicator

If you look closely to the Aroon Indicator you will see that it is made up of a red line and a blue line. On the chart you will notice also the 70 and 30 horizontal line. When the Red line is above the 70 line and the blue line is below the 30 line, this indicates that the markets are in a downward trend.

Instead when the Aroon Up Indicator, the blue line, is above the 70 line and the Aroon down Indicator, the red line, is below the 30 line then the market is trending Upwards. 

When both the Aroon Indicators are in the centre of the trading chart then this means the market is consolidating.

The default setting of the Aroon Indicator in your spread betting account is 14 periods. This means it is 14 bars of the time frame you are looking at. f you increase the Time frame to 25, which is the By varying the period length, the Aroon indicator can give long term indications of trend or short-term indications of trend. By default, the Aroon indicator is 25-periods, the more you increase the periods the longer trends you will spot.

But pay attention: the longer the time frame, the less sensitive it is to a changing trend.

On the other hand if you decrease the time frame it will react quicker to changing trends but it could miss out on long trends, showing you more trades and changes of direction.

The Aroon indicator measures how many periods since the price recorded a x-period high or low. The Aroon-Up and Aroon-Down are two separate indicators and measure: (As per the 14 period setting in your IG account) Aroon-Up measures the number of days since a 14-day high; and 14-day Aroon-Down measures the number of days since a 14-day low.

The Aroon indicator is unique as it focuses on time relative to price, unlike the typical momentum oscillator.

Here is a simple spread trading example of how to trade the Aroon Indicator