Developed by the Chicago Board of Options Exchange Market Volatility (CBOE), VIX measures market volatility. In this guide, we’ll talk about what the VIX is and what its trading strategy is.
What is the VIX indicator?
VIX, or volatility index, measures the implied volatility in the market. It is known as the Fear Index or Fear Gauge. CBOE initially created the indicator to measure the volatility of SP500. However, you can use it on any asset.
The concept behind the VIX is that you can get a snapshot of the asset that will perform through volatility. A high VIX value indicates higher market volatility, while a lower value signifies lower volatility.
The MT4 version of the indicator has a signal line, which you can gauge to find the volatility and then look for the overall trend.
VIX Strategy
To trade with the indicator, you must look at the VIX line. This line signifies the volatility of the asset. If there is high volatility, then the VIX will be above. Whenever there is high volatility, the market tends to go up. So, you can look for long-entry positions.
On the other hand, if there is less volatility, the VIX line will be low, and you can look for potential short entry points.
However, volatility is the measurement of market uncertainty, and if the market is highly volatile, you can expect a high level of uncertainty. So, you can’t fully rely on VIX; you have to add another indicator to confirm the signals. You can add indicators like the RSI, MACD, or Bollinger Bands.
One thing to note here is the consolidation. VIX stays in a particular range when the market consolidates or moves sideways. Even if the VIX is high or low, it’s better to avoid taking positions here and wait for the trend to form.
Another factor to consider is the VIX strategy doesn’t work on shorter timeframes. It is because the volatility levels on shorter timeframes can increase significantly. For instance, there is high volatility in news events.
Buy Signal
- The VIX line must be at the top.
- Wait for the price to go upwards, and then enter the trade after two or three candles.
- Place a stop-loss at the recent low.
- Set take-profit at a recent high, or exit the trade when the VIX drops to the bottom.
Sell Signal
- The VIX line must be at the bottom.
- Wait for the price to go downwards, and then enter the trade after two or three candles.
- Place a stop-loss at the recent high.
- Set take-profit at the recent low, or exit the trade when the VIX goes to the top.
VIX trading strategy Pros & Cons
The VIX trading strategy is not perfect; it has ups and downs. Here, we’ll talk about the pros and cons of the strategy.
Pros
- The VIX trading strategy is easy to understand.
- It can present clear entry and exit points.
Cons
- You need to apply other indicators for further signal
- The indicator can give false signals.
Conclusion
The VIX trading strategy uses the VIX indicator to find market volatility. The strategy is easy to understand and can help you if you are a beginner. You can also combine the VIX indicator with other indicators to have further signal confirmation. As with any forex strategy, you should have excellent money management so that one bad trade does not cancel out a consecutive run of winners. You can always practice trading on a forex demo account to begin with to improve your trading skills and build up your confidence.
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