Keep a check on VIX to manage your Forex trading risks

Keep a check on VIX to manage your Forex trading risks

Submitted by adil on Mon, 11/24/2014 - 14:06

One of the main reasons that the traders are scared to jump into the trading market is the fact that they are unable to access the risks and are advised not to start trading without actually analyzing the trading tends and techniques. The risk factor is very high and it seems very scary for new comers to put their valuable assets on stake. Therefore most of the experiences traders recommended that you must be aware of risk levels at all times. In general, market traders need to follow the VIX volatility index which can update them about the risks that might occur. Given below is some useful information about VIX volatility index and how new traders can make use of this information to mitigate the risks.

What is VIX?
This symbol is used to indicate the Chicago Board Options Exchange's volatility index. Basically it is a measure of the level of implied volatility of a number of options which are based on S &P 500. Here it is important to mention that S&P 500 is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. VIX is also known as the ‘investor fear gauge’ as it is a representation of the best prediction made by the investor during volatility. It is observed that the VIX volatility index tends to rise during situation when the financial stress is high and investors become more vigilant. VIX is one of the best tool for determining the near-term volatility in the market.

VIX and Stock-Market Behavior
Although the market behavior is influenced by a number of factors, the VIX is a very good indicator about the increase in investor fear and low complacency. Although the relationship between XIV and market trend has repeated over time in bull and bear cycles, but it tend to get effected by other factors as well. During market turmoil the XIV spikes very high and indicates the declines in stock ranges. During time periods, where the bullish trends are higher the investor fear is less. If the investor fear is measured closely, the changing market trends can be predetermined for reducing the risk factor.

How to mitigate the Risk factor?
It is clear from a number of example that the stock averages might move high or low due to the drifting market trends, but it is not necessary that the VIX level may have a direct influence on them. Historical data clearly indicates that complacent investors may suffer great losses with the fall in prices unless they pay attention to the fluctuating value of VIX indicator. A few experiences traders also suggest that Risk in trading is one factors which cannot be totally controlled, especially for emerging markets. Statistical pricing models depend on the normalcy within two standard deviations, but outside of the scope of these norms, this assumption can totally destroy all the theories.