Wednesday, September 23, 2009

What's the Market Telling Us

Listening to the market is a vital part of trading. There are many ways traders can do this:

-Reading the tape and order flow
-Reading about general macro sentiment
-Tracking indicators (VIX,TICK,TRIN)

The last one is a extremely helpful because these indicators are readily available to us each day. We can gauge them against past performance and averages, as well as use them in real time. Looking at the VIX can provide insight into market sentiment (put buying and the premium traders are willing to pay for this protection), as well as a benchmark for the type of moves we can expect and general market volatility (whippiness, volume, ranges, etc).
Looking at the graph of the daily VIX below, we note that today we broke the prior intra day low of the year of 22.48 set on 9/11. The key is adjusting our trading to this. We have been in a downward VIX trend, and the action has been falling in line with this. Clearly less volatility in the market tends to be experienced with tighter ranges (and therefore fewer "follow through" trades), range bound and choppier activity, and in general "slower" moves.
Taking the extra step to assess the indicators we track and the current market environment can often lead to laying off marginal trades, and focusing our attentions on our best (and most profitable) ideas.

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