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
EUR/USD drops to daily lows near 1.1630
EUR/USD now loses some traction and slips back to the area of daily lows around 1.1630 on the back of a mild bounce in the US Dollar. Fresh US data, including the September PCE inflation numbers and the latest read on December consumer sentiment, didn’t really move the needle, so the pair is still on course to finish the week with a respectable gain.
GBP/USD trims gains, recedes toward 1.3320
GBP/USD is struggling to keep its daily advance, coming under fresh pressure and retreating to the 1.3320 zone following a mild bullish attempt in the Greenback. Even though US consumer sentiment surprised to the upside, the US Dollar isn’t getting much love, as traders are far more interested in what the Fed will say next week.
Japanese Yen refreshes three-week high vs USD; seems poised to appreciate further
The Japanese Yen retains bullish bias as BoJ rate hike bets offset dismal Household Spending data. Dovish Fed expectations fail to assist the USD in attracting buyers and keep a lid on the USD/JPY pair. Traders keenly await the US PCE Price Index for Fed rate-cut cues and a fresh directional impetus.
Editors’ Picks
EUR/USD drops to daily lows near 1.1630
EUR/USD now loses some traction and slips back to the area of daily lows around 1.1630 on the back of a mild bounce in the US Dollar. Fresh US data, including the September PCE inflation numbers and the latest read on December consumer sentiment, didn’t really move the needle, so the pair is still on course to finish the week with a respectable gain.
GBP/USD trims gains, recedes toward 1.3320
GBP/USD is struggling to keep its daily advance, coming under fresh pressure and retreating to the 1.3320 zone following a mild bullish attempt in the Greenback. Even though US consumer sentiment surprised to the upside, the US Dollar isn’t getting much love, as traders are far more interested in what the Fed will say next week.
Gold makes a U-turn, back to $4,200
Gold is now losing the grip and receding to the key $4,200 region per troy ounce following some signs of life in the Greenback and a marked bounce in US Treasury yields across the board. The positive outlook for the precious metal, however, remains underpinned by steady bets for extra easing by the Fed.
Crypto Today: Bitcoin, Ethereum, XRP pare gains despite increasing hopes of upcoming Fed rate cut
Bitcoin is steadying above $91,000 at the time of writing on Friday. Ethereum remains above $3,100, reflecting positive sentiment ahead of the Federal Reserve's (Fed) monetary policy meeting on December 10.
Week ahead – Rate cut or market shock? The Fed decides
Fed rate cut widely expected; dot plot and overall meeting rhetoric also matter. Risk appetite is supported by Fed rate cut expectations; cryptos show signs of life. RBA, BoC and SNB also meet; chances of surprises are relatively low.
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