Day Trading: Using Daily Volatility (VIX) to Your Advantage

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The VIX volatility index and it's uses
The VIX volatility index and it's uses © forexop

Much of the recent volatility in the markets has come on the heels of the Fed’s FOMC announcement as well as tensions rising as a product of Iran and Syria’s geo-political troubles. Day traders should understand that news of the day greatly affects both pricing and volume, and should be used when setting up daily strategies and when pulling the trigger – both in buying and selling.

The CBOE Volatility index is an excellent play for many day traders in this climate given that Black Swan events are an almost daily occurrence.

The VIX, which measures implied volatilities in S&P 500 options contracts is often seen as a broad based predictor of the market’s risk appetite. Sometimes called the “fear gauge”, an increasing VIX indicates risk aversion and less demand for high yielding currencies.

A falling VIX means increasing demand for risky assets – generally this a forward indicator of “dollar weakness” (see long term VIX chart).

VIX has shown a bit of restraint lately as charts and volume suggest, but as this index has been pushed down into the low 20’s and even high teens, it is coiled and ready for a push upward. The VIX can push upwards of 10%-20% in one day, making it one of the best day trades out there if one knows how to trade the news.

Oil: As oil continues is slow march upward and as the US ratchets down on Iran’s oil supply, potentially igniting further sanctions or even military action in the near future, the VIX is a great buy and hold play for day traders and those with short to medium buy and hold strategies.

Take this into consideration: on a day where most major indices were in the red 1%-2%, the VIX was up nearly 5% on the day and, if it were played correctly on much of the news coming from the Middle East, a day trader could have made twice that in pure profit having pulled the “sell” trigger at an opportune time intraday.

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About the Author

Steve Connell has spent over 17 years working in the finance sector as a trader/market maker and strategist. Over that time he’s worked for several global banks and hedge funds. Steve has a unique insight into a range of financial markets from foreign exchange, commodities to options and futures.

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