VIX

The past week has been extremely volatile. On Monday the S&P 500 index dropped almost 1.5%, on Tuesday it run up for about 3.5%, on Wednesday the S&P Index advanced for 1% at the opening only to drop later by 3%, on Thursday we had 2% rally up again and on Friday the S&P 500 declined for 3% with 1% recovery by the end of the session. Scary week…. If we take a look at the VIX (Volatility Index) we see that the VIX is around the highest levels we saw on January 22-23, 2008.

I believe many traders faced the situation when the technical analysis they used simply does not work. You open a position when it too late and right before the market reverses it’s trend and you cut losses again right before another reversal…

Welcome to the volatile market. I have already mentioned several times that when the market changes it’s direction very fast (volatile market) the intraday charts should be monitored more closely. That’s when the VIX index becomes handy. It would be wrong to assume that the same trading system (the same indicators setting) should work forever and in any market condition. Even if a trader has a successful trading system that has supported him/her over the past year and now it’s started to generate fake signals - it would be wrong to say that the system is bad. No! There is nothing wrong with the system, simply this trader did not pay attention to other indicators and did not do his homework. All he has to do is to adjust the trading system to the volatile market.

If you see that trading system you used over long period of time has started to generate signal too late then it means that you have to adjust the system instead of throwing it away. Maybe, you have to change the period setting of the indicators; maybe you have to change the signal trigger level… It does not mean that the changes you are making has to be constant - when you see that the stock market is back to the normal trend, when you do not see any more crazy swings and when VIX is down again (perfect indicator of volatile market) – I believe, it would be possible and logical to come back to the old system, to the old chart and indicators settings which supported you before.

One of the best trading strategies in the volatile market could be staying out of the market. Some traders may prefer to say in cash and do not trade at all when they see the high VIX levels. Yes, in volatile market you can may quick and good money, yet, at the same time you may lose everything very fast.

My point is that every trading system has to be monitored on a constant basis and has to be adjusted to the market condition. For the current market simple rule could be embedded into each system:

If I see VIX at high level then I should stop trading and using my technical indicators until the VIX is back below the level that is critical for my trading system

or

If I see VIX at high level then I should adjust my trading system and technical indicators and come back to the old system setting when VIX is back below the level that is critical for the system.

Coming back to the chat that I made a habit to have posted every week, I may say that the technical indicators on the S&P 500 index are not very optimistic. They point to the possibility of the further slide. Again, remember – we are in volatile market and sentiment could be changed very fast…