Headlines like these need to be put into perspective:
- “US registers its biggest one-day rise since 1933”.
- “Global markets fall 12%, their biggest one-day loss since the 1987 flash”.
- “Markets slashed, Markets surge”.
- "$187 billion dollars wiped from markets” etc.
These kinds of headlines make us look straight to one indicator – volatility. Why? Because understanding ‘vol’ as traders in these times is vital to your trading and risk management.
First off, we need to understand how the VIX index can tell us the daily implied move.
Without diving too far into statistics and modelling, the daily implied move can be worked out by the square root of time. i.e. the square root of 252 days (the amount of trading days in a year) which is 15.8.
From there, divide the VIX index by 15.8 –so when the VIX maxed out at 82 last week, the implied move in the S&P 500 was +/- 5.2%.
It’s important to acknowledge that volatility does not recognise direction, it can’t tell you that. But clearly rampant vol. is due to mass increases in put buying, which is caused by high levels of market selling. So, for most of the time, the market is likely to fall in high bouts of vol.
This information can give you a base to understand your trading risk and price ranges.
Again, using the idea above, the implied daily range, with a VIX of 82, is 10.4% (+5.2% or -5.2%), which we have seen in intraday trading. Think back to Friday the 13th, the ASX initially fell over 4.7% then rallied back and closed up over 4.4%.
In understanding vol., you understand your trade risk. And in understanding your risk, you can make more informed trading decisions.
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Editors’ Picks
AUD/USD hovers around 0.6500 amid light trading, ahead of US GDP
AUD/USD is trading close to 0.6500 in Asian trading on Thursday, lacking a clear directional impetus amid an Anzac Day holiday in Australia. Meanwhile, traders stay cautious due ti risk-aversion and ahead of the key US Q1 GDP release.
USD/JPY finds its highest bids since 1990, near 155.50
USD/JPY keeps breaking into its highest chart territory since June of 1990 early Thursday, testing 155.50 for the first time in 34 years as the Japanese Yen remains vulnerable, despite looming Japanese intervention risks. Focus shifts to Thursday's US GDP report and the BoJ decision on Friday.
Gold price treads water near $2,320, awaits US GDP data
Gold price recovers losses but keeps its range near $2,320 early Thursday. Renewed weakness in the US Dollar and the US Treasury yields allow Gold buyers to breathe a sigh of relief. Gold price stays vulnerable amid Middle East de-escalation, awaiting US Q1 GDP data.
Injective price weakness persists despite over 5.9 million INJ tokens burned
Injective price is trading with a bearish bias, stuck in the lower section of the market range. The bearish outlook abounds despite the network's deflationary efforts to pump the price. Coupled with broader market gloom, INJ token’s doomed days may not be over yet.
Meta Platforms Earnings: META sinks 10% on lower Q2 revenue guidance Premium
This must be "opposites" week. While Doppelganger Tesla rode horrible misses on Tuesday to a double-digit rally, Meta Platforms produced impressive beats above Wall Street consensus after the close on Wednesday, only to watch the share price collapse by nearly 10%.
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