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What Key Trend Line Break On Weekly VIX means to day traders?

08/03/2007 12:00 am EST


John Netto

Author, The Global Macro Edge

For those that traded that wonderful summer of 2002 can remember, daily ranges on the S & P of 70 points, massive intraday range across the major indexes, parlayed with the makings of a longer term bottom in the equities markets, provided ample opportunity for both bulls and bears to profit from the phenomenal range.

Why is a wide range such an advantage to professional traders? This range is a byproduct of the amalgam of emotions portrayed by the market and exudes an energy that creates lots of opportunities. Many in the media are frowning on the recent market volatility, citing how difficult it makes the markets to forecast and trade. However, akin to a live poker game with a lot of loose players with deep stacks; you may see larger draw downs as a result of the wider range, but you will also have exponentially more opportunities to take advantage of those opportunities and exploit your trading edge.

In a live poker game, it is the desire of the superior player to get in as many pots as possible with players of a lower skill-set. A similar rationale applies in a market with lots of volatility insofar as emotionally dominated markets usually see retail investors getting panicked and succumbing to their emotions when they trade, providing more chances to profit.

As an example, with the Volatility Index languishing in the low teens, as it has for the last few years, each day requires day traders to be extremely selective. This dearth of trading chances may necessitate traders to work larger position sizes to account for the lower volatility and fewer opportunities. The range seen over the last four weeks has seen more retail money work into the game, as the fear in the markets has escalated quite drastically. More retail money provides opportunity to profit as emotion can push the markets to extremes.

The last 8 days have seen a range in the S and P of 36, 22, 60, 40, 30, 40, 33, and a more subdued 19 points from today. My trading strategy relies heavily on the use of three components, with the primary being Fibonacci levels. Fibonacci levels work best in a market laden with emotion and energy. Due to Fibonacci levels being reactive to market range, increased volatility simply requires an adjustment of the size traded to make sure that not trade risks more than an account can tolerate per trade.

As the breakout in the VIX illustrates, the forthcoming months should provide lots of opportunity for traders on both sides of the markets.

Best Wishes
John F. Netto

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