Thursday, 17 June 2010

The VIX Indicator: Beat the Crowds to Big Profits with the Ultimate "Fear Gauge"

The VIX Indicator:

Beat the Crowds to Big Profits with the Ultimate "Fear Gauge"

June 17th, 2010

Investors are motivated by two things and two things only: Fear and Greed. It's just that simple.

So more often than not, investors turn quite bullish when they think a stock is headed higher and quite bearish when they fear that all is lost. The trouble with this strategy is that during these extremes in sentiment they often lose their shirts.

While conventional financial theory suggests that markets behave rationally, not accounting for the emotional aspect of the trade often leads to the wrong entry and exit points.

And believe me when I tell you this: It's hard to turn a buck on the Street when you're constantly getting one or both of them wrong.

That's why successful traders often rely on the VIX indicator to assess whether or not the current market sentiment is excessively bullish or bearish... which helps them plot their next move.

You see, the VIX is a contrarian indicator. That is, it tells you whether or not the markets have reached an extreme position. If so, that tends to be a sure sign that the markets are about to stage reversal.

The idea here is that if the wide majority believes that one bet is such a sure thing, they pile on. But by the time that happens, the market is usually ready to turn the other way.

Of course, "the crowd" hardly ever gets its right.

It's counter-intuitive, but it's true nearly all of the time - especially in volatile markets.

And that's why the VIX indicator is a trader's best friend right now.

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