Successful traders often use the VIX indicator to judge whether or not the current market sentiment is excessively bullish or bearish. In turn, this helps them plan their next move.
The VIX Index is a contrarian indicator meaning it tells you whether or not the markets have reached an extreme position. If so, that tends to be a pointer that the markets are about to stage reverse. Consider the logic of one person betting on a given horse. However by the time the race begins; the favourite has been trumped by the underdog. Of course, the masses rarely make the best, most viable decision. On that very premise, the VIX index is counter-intuitive, but it's accurate nearly all of the time - especially in volatile markets. Consequently, that's why the VIX indicator is a trader's best friend right now.
As for spread betting in the current climate, thankfully the markets are slowly recovering. The FTSE 100 is back to levels it maintained in September 2008. There is an element of calm in, what has been, tumultuous recent economic times. Therefore, now is the right period to place your spread bets on the rebound of market volatility, in essence ‘the boomerang effect’. Incidentally, insurance premiums are also way down as investors fears have evidently ebbed somewhat.
The VIX index, known as the ‘fear gauge’ measures market volatility. It is an invention from the U.S, measuring the anticipated volatility on the S&P 500. It tells us the likelihood of the market swinging up or down over the next month. When the markets are volatile, it serves a high reading. When the markets are calm, the reading is low. Currently, the VIX Index is trading at the bottom of its two year range. Although the VIX forecasts upward and downward swings, in reality, the VIX is much more sensitive to market falls than rises, hence the nickname ‘fear gauge’. It is a great hedge against a fall in the stock market.
The VIX index is low at the moment. Thus, the market is telling us that we’re back to normal, in line with the trading times of summer 2008. When the market lurches downwards, the VIX Index lurches upwards. For instance, during the dotcom bust and the Asian crisis, the VIX Index went to 45 and 46 respectively. All these points mark the VIX Index as a robust point of reference for a canny spread better.
