Simply put, it is a yardstick or indicator of the sentiment of traders that reign in the market. Such an index is calculated based on the volatility of the current option prices for the financial instrument under study.
When the majority of traders calmly perceives the stock market situation, then such an index falls to the minimum values. And vice versa. If the market is in panic, investors expect an increase in volatility , then this indicator rises to the highs.
It is useful to add the signals of the Volatility Index CBOE:VIX indicator to the existing trading system, this will strengthen the trading system and clarify the entry points to trading positions, and, as a result, increase
the profitability of a trading strategy.
High profit factor with a fairly low drawdown ~ 13%.
In the mid-90s of the last century, the VIX index began to be calculated on the Chicago Stock Exchange. This is a volatility indicator that reflects (predicts) the expectations of investors from the US stock market for the next month. The calculation is based on the actual prices of options contracts for the stocks that form the S&P 500 Index.
The second name of the VIX is the fear index. The indicator reflects the mood on the stock exchange and the general direction of the quotes movement. Let’s remember the saying: If the VIX is high, it’s time to buy. When the VIX is low, look out below! Translated into Russian, this means: when the fear index is high, buy; when low, expect prices to decline.
The theory provides an unambiguous interpretation of the VIX values. When this figure exceeds 40 points, there is panic on the stock exchange. Market participants do not invest in risky assets; on the contrary, they transfer money into reliable instruments with fixed income. At such times, stock quotes show historical or global lows. Long-term purchases are interesting.
When the VIX falls below the 20-point mark, a bullish trend prevails on the exchange. If quotes for financial instruments from the portfolio reach long-term highs, you should think about closing or reducing the held longs.
At the same time, the fear index does not always reflect market conditions. For example, over the past few years, the VIX has been close to lows regardless of fluctuations in the S&P 500. Even when the US stock market is bearish. Analysts associate this situation with the artificial pumping of the financial system with dollars.