With Volatility at the level it is, think it would be wise to unpack it as an indicator for trading.
Because understanding ‘vol’ in these times can add a dynamic to your trading and risk management.
With vol at the record, all-time highs for the likes of the S&P 500 using the VIX as an indicator for the daily implied move can be vital to trade determination.
Without diving too far into statistics and modelling one can work out the daily implied moved by working out the square root of time.
That is the square root of 252 days (the amount trading days in a year) which equals 15.8 (rounded).
From there divide the current VIX index by 15.8 – so using the max VIX of 82 the implied move in the S&P 500 was +/- 5.2% per day.
It’s important to acknowledge that volatility does now recognise direction. However, rampant vol is due to mass increases input buying due to high levels of market selling. Therefore, one can conclude that for most of the time, the market is likely to fall in high bouts of volatility.
This simple calculation can give you a base to understand your trading risk and price ranges.
Therefore using the S&P 500 again the implied daily range, with a VIX of 82 is 10.4% (+5.2% or -5.2%) examples of which we have seen think the 13th of March when the ASX initially fell over 4.7% to then rally back and close up over 4.4%.
If you can understand vol, it can give you a base for your trading risk. And in understanding your trading risk allows you to make more informed trading decisions.
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