VIX is often used as a market timing indicator for the S&P.
But are traders using it wrong?
Is there a better way?
Here’s 3 insights from my chat with Rob Hanna Quantifiable Edges on “New Volatility Based Trading Techniques”:
1. Conventional wisdom
The VIX and S&P tend to move inversely to each other.
Traders often use VIX signals to time the S&P.
2. Short-Term Predictors
Just using the S&P to time itself actually works better than using the VIX to time the S&P.
Also, short-term indicators for the S&P are better predictors of VIX movements than VIX can predict the S&P.
3. Faster recovery
VIX recovers faster than the S&P.
Traders can use this shorter recovery to reduce the length of drawdowns.
“Short and hold” in the VIX has much shorter drawdown periods than “buy and hold” in the S&P.
4. Example
Here’s an example showing a VIX trading model based on S&P signals:
While the VIX can be useful in timing the S&P, there may be more value in using the S&P to time VIX.
Doing so could reduce the length of drawdowns.
Full Interview
Watch my full discussion with Rob:
Click here to check out the BST YouTube channel for more great trading content.
