Usually my posts get into the nuances of trading on a whole with such topics as trading plans and setups. However, today I’m going to use a market specific example to discuss the recognition of a trend and subsequent obvious trade setup.
The definition of a trend is the general direction of a market or of the price of an asset. Trends can vary in length from short, to intermediate, to long term. If you can identify a trend, it can be highly profitable, because you will be able to trade with the trend.
Now, when most people think of trends they think of a stock trending higher or lower making consecutive higher highs or lower lows. This is the most common look and use of the trend thesis.
However, there are also trends that can lead to very profitable trading opportunities not fitting the traditional mold. Ones that are less quantitative and more qualitative. Here’s a clear example:
The Volatility Index (VIX)
Over the last 5 years I’ve seen a clear trend in the CBOE market volatility index. It’s the VIX or the VIX–X depending on your service. You can even look at the VXX volatility ETF if you like. The trend is present in whichever.
Every time there is a large spike in the VIX the past 5 years it has presented a clear trading opportunity to get short that index. Sometimes that has been at 40 and other times at 50. There really isn’t a super clear trend price-wise, but there is an obvious trend price action-wise.
This trend has become obvious as it has occurred over an extended period of time, however, the trading opportunities within the trend have been rare. This actually may be one of the reasons the trend is so clear. In the past year we have only seen the VIX spike above 30 twice. Over the past 5 years it’s spiked above 45 just three times. That’s what makes this trend so clear and evident.
The current market environment just doesn’t support higher volatility. We’ve had some volatility of late, but we need to see a fundamental change before we can assume this trend is no longer valid.
I will continue to watch this trend and look for trading opportunities on any large quick spikes in the VIX for the time being.
Remember, “Victory Loves Preparation”