Operating in a Volatile Market: Are You Making the Most of the Vix?
Wednesday 24th September 2014
Whether you’re completely new to trading and investment, or you’re a seasoned investment veteran, it’s always good to learn new techniques that can help you to be a safer investor.
To do this, you need techniques that will make your buying and selling of a particular asset more reliable. In other words, you don’t want to be consistently buying large quantities of an asset where its price falls immediately so you can’t sell, and in order for this to happen, you need to understand market volatility. In this article, we explain the basics of market volatility and introduce the Vix – one of the ways you can assess how volatile the market is, helping you to make better investment calls.
What Is Volatility?
Just like any system with multiple interacting parts, the interaction leads to some sort of emergent behaviour. In our case, the moving parts are the buying and selling habits of every individual participating in the market, and the emergent system is the overall market behaviour. However, because the buy/sell behaviour of individuals around the world cannot be accurately predicted, the resulting behaviour is chaotic, and therefore volatile.
Volatility such as this makes it very difficult to have a 100% track record when it comes to selling, and it’s also why people say that investment is inherently risky. The trick becomes, therefore, to know how to manage the risk.
Introducing the Vix
One of the best ways to manage the risk is by using a fear index like the Vix. In one sentence, the Vix is useful because it provides the trader with a snap shot look at how fearful/nervous the other participants in your market are, helping you to understand how the market might move next. As this video tutorial by Killik & Co reveals, the higher the Vix index is, the more volatile the market is, and this can tell you that it might not be the best time to invest.
Other Ways to Predict Volatility
Of course, the Vix isn’t the only number to predict the rate of volatility in the market. Other indicators like the result of a Standard Deviation calculation can tell you how far from the average price a particular asset is up until the current point.
So the Vix is one tool in a large toolbox of techniques that you can apply to the not insignificant problem of market volatility. It won’t guarantee a 100% positive investment record, but it will help you to make smarter decisions about when to buy and sell.
Editorial Contact Details - Conor Shilling