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Take a guess what type of indicator the ultimate oscillator is? That's right, an oscillator.
It was created by none other than Larry Williams the king of oscillators. Larry is also known for the Williams %R and the Stochastics oscillators. To learn more about Larry and his other indicators, check out his Wikipedia page here.
The indicator was first released in 1976 and at the time, "ultimate" was a really catchy way to brand a new indicator. Remember at this time, Larry had already released a number of other indicators and he needed to make sure this one stood out.
How to Calculate the Ultimate Oscillator
The one immediate standout for the ultimate oscillator is that it factors in 3 input periods 7, 14 and 28. This is different from other oscillators that have one input period, for example, 14 that looks back over "x" range.
The indicator is centered around two key inputs - buying pressure and true range.
Ultimate Oscillator Formulas
Buying Pressure (BP) = Close – Min (Low or Previous Close)
True Range (TR) = Max (High or Previous Close) – Min (Low or Previous Close)
Average 7 Periods = Sum of BP over the last 7 periods / Sum of TR over the last 7 periods
Average 14 Periods = Sum of BP over the last 14 periods / Sum of TR over the past 14 periods
Average 28 Periods = Sum of BP over the last 28 periods / Sum of TR over the past 28 periods
Ultimate Oscillator = 100 * [(4 * Average 7 Periods) + (2 * Average 14 Periods) + Average 28 Periods] / (4 + 2 + 1)
What is Buying Pressure?
The buying pressure is all about seeing how well a stock closes relative to its current low and the previous low. This lets you know if there is any buying interest in the security. If the close is near the low point of both the current and previous period, then that's an inidcation there is little to no buying pressure.
What is the True Range?
The true range measures the high to low range of the current high or prior close to the current low or prior close.
How is the Ultimate Oscillator Plotted?
The indicator oscillates between 0 and 100. When the indicator is said to have a high reading over 70 and a low reading below 30.
Above is a 5-minute chart and you can see the clear overbought and oversold readings on the chart. Seems simple enough right?
Just buy when the indicator is below 30 and sell when the indicator is over 70? Wrong.
Since we know this is a bad idea, let's walk through 2 strategies you can test out.
Strategy #1 - Exploit the Divergence
Let's first start with how to use the indicator with trending markets. This is where oscillators have the toughest time forecasting market direction.
A stock could give a sell signal as the indicator goes well above 70, but this does not mean the stock is going to roll over immediately. A stock can remain in an overbought state for an extended period of time.
Overbought Stays Overbought
This is where oscillators can really get you in trouble. An overbought stock can stay just that - overbought. Now in defense of the ultimate oscillator, you are going to face this reality regardless of your oscillator of choice. It's just the nature of the beast.
The reason is that a stock can oscillate from overbought to the midline around 50 indefinitely. This is great if you are long and riding the trend higher.
However, if you are short, it can lead to the death of a thousand cuts as the stock drags higher, slowly draining your account value.
This can also play out on the downside as well. If you step out front and catch a falling knife, it can just continue lower and if you are long it's not a good feeling.
So, how do you use the oscillator when the stock is trending hard? Simple, you don't assume just because the ultimate oscillator is above 70 you should go out there and start shorting.
So, instead of just selling because the stock is overbought on the oscillator, use it has an opportunity to see if you can jump on board with the trend.
Divergence is About Timing
It's going to feel counterintuitive, but if a stock makes a high and then breaches that high again, it could be ripe for a breakout trade. The problem is that the ultimate oscillator may have a lower reading on the break of the recent high.
All of the experts will tell you that you should sell the divergence, but it's not that simple. While divergence is in play, who knows when the divergence will lead to a selloff.
Therefore, you could try buying the break and then using a stop management system to protect yourself and then ride the wave higher. Even in the example above, there was a clear divergence but the stock nevertheless climbed higher.
Remember It's About Timing
Again, please do not read this and say divergence means buy or sell. You have to size up the trade. But what I am saying is that if a divergence presents itself, it does not mean it is going to instantly playout in the market. The divergence could be a result of the fact the first move was so strong, it reflects a significant change in trend that is not meant to be exceeded by the indicator on the short-term.
Strategy #2 - Buy or Sell the Panic
One of the hardest things to do is to buy the panic. I don't have the right mindset to jump out in front of the train, but if you do it can prove valuable.
It's rather simple, you are buying as everyone is panic selling and once the panic selling subsides, the stock will make some sort of run higher.
This does not mean it will exceed the days high if you are day trading, but it does mean you are likely to see a move.
One strategy you can use when trading with the ultimate oscillator is to identify a panic selling point at support. You want to see a spike down in the ultimate oscillator to extreme levels. It's not enough for the oscillator to hit 45. You need to see it tank.
Then wait for the stock to reclaim the level. You then buy the break back into that level and place your stop below the recent low.
The stop is critical because if the stock rolls over and goes lower, you have to take your lumps in order to live to fight another day.
Here is a chart example of the stock VRAY. The stock was in a clear trading range for 5 days before having a panic selloff on the sixth day. This panic selling quickly subsided and the stock was able to regain the prior support level. Guess what happened next?
That's right, the stock stabilized and moved higher. Ultimately the next day the stock shot up in a parabolic fashion
Buy the Panic
While the name may make you feel it's beyond reproach, the ultimate oscillator is just like any other indicator. It has its strengths and weaknesses. As you can see from this article we took a different approach rather than reciting the same strategies repeated over and over again on the internet. It doesn't mean those can't work but in trading, you will need to find an edge.
It's not enough to just sell divergence or place a buy order just because the indicator goes below 30. You have to be smarter than that and you are.
How Can Tradingsim Help?
Interested in exploring the ultimate oscillator further but need a place to test your ideas? You can use Tradingsim to practice trading with the indicator on real tick data for the past 2 years.
You can test the strategies detailed in this article as well as make up your own.
Learning how to trade is completely possible. It comes down to the right mix of "ingredients" that will produce a winning trader and more importantly a winning mindset.
Well in this post, I will walk you through 9 elements which have helped guide me on this journey.
#1 - Trade Less
The first thing people think of at times is that day trading comes down to placing many trades throughout the day. This couldn't be the furthest thing from the truth. You can be a day trader and only place one trade per day.
It's not about the amount of activity that somehow lets you in the club. This is not a knock to my scalpers out there, but the point is if you are starting out it's not about placing 100 trades per day.
If you are really new at trading, it's probably best that you only place three trades per week. The first reason is that it limits your exposure to the market, which allows you to dissect and process your trading activity.
The second reason is that it allows you to day trade with less than $25,000 dollars which means you can only place 3 round trip trades per week anyways.
Bottom line, give yourself time to learn the game before increasing the number of trades if you ever need to increase it at all.
#2 - Trade Small
The other misnomer out there is you need to have a lot of money to make money in the market. One of the biggest accomplishments of my trading career is when I took a $3,500 dollar account up to $7,500 in 5 months. You would have thought I hit the lottery of life.
If you are unable to make money trading a small account, you will not have any greater success plunging thousands of dollars in the market.
Remember, time is on your side and the only one rushing is you.
#3 - Become an Expert of One Strategy
There are traders that are able to trade 5, 7 or even 10 patterns effectively. Well, guess what? You only need one pattern to work for you to make a living trading.
Now, I don't always get it right and sometimes make some bonehead mistakes. But focusing on these two patterns has allowed me to perfect my entry, stop and exit rules. This has resulted in me being able to turn a profit on a weekly basis regardless of how the broad market is trading.
Below are examples of the trades I look for every morning.
#4 - Master Your Craft
Please do not make the mistake of buying a trading course, looking at it once and then going out here and trading with professionals.
Trading is like any other specialized skill. It requires practice and then more practice.
You have to put in the hard work if you want to be a success.
This doesn't mean trading only when the market is open. This also means you put in the time outside of market hours. For me, I love to review trades over the weekend.
It's like everything slows down and I am able to process the charts in front of me with such clarity.
#5 - Journal
Show me a struggling trader and I will show you a trader that does not journal on a regular basis. As a trader, you need to be more of an analyst than a technician. This means you need to figure out not only what system works but how you are trading within that system.
Journaling allows you to not only review your trades but also your mental state when placing those trades. For me, I have never had a losing streak when I was journaling.
It's only when I start trading
#6 - Take Money Out of the Market
You need to take money out of the market, so the reality of what you are doing hits you. If you do not take the money out it will find a way to leave you.
There are those that can just compound their returns day after day. But for us mere humans, taking the money out of the market helps with the psychological barriers that prevent us from having breakthrough success.
Similar to your job or profession, you would not come to work every day and not get paid.
#7 - Focus on One Time of Day
I cannot trade the midday for my life. Those of you that follow the blog know this because I have been very transparent about my struggles.
However, put me in the morning and I can generally walk away a winner.
One of the first things you should do is focus on a specific time of the day and commit.
So, if you are going to day trade the morning, then do that and do it with conviction. If you are going to trade wedge patterns during lunc, then do that as well.
Lastly, if you want to trade end of day patterns to see if you can catch the final push higher, that's okay as well.
But please, please do not try to trade all day when you first start. I literally could have saved thousands of dollars and countless hours of headaches if I only followed that one rule.
#8 - Be Prepared for the Long Haul
If you are going to trade then that's what you are going to do. Do not get in the game, only to quit a few months or even a year after starting.
Treat this decision like it is irreversible. Now, this does not mean go down a blind path of financial ruin. It more means you are going to take a mature and methodical approach to learn how to trade.
I still believe anyone can learn how to trade, it just takes a person sticking in the game long enough to learn what works and how to become a successful trader.
#9 - Read About Other Self-Made Traders
At times you will need to find inspiration to keep going. Now I don't suggest you google millionaire stock trader, because this may bring out the greed which you need to keep under control.
I highly recommend you read books like Momo Traders or Zero to Hero which are more interview style publications. This will allow you to get into the psyche of these traders to see what makes them work.
Again, I am a firm believer it's not about the strategies, but more about learning what makes some traders tick and how they are able to win and win on a big scale.
How Can Tradingsim Help?
If you are looking to learn how to trade, you can test out your strategies in the Tradingsim market replay tool.
The Ulcer Index measures the amount of risk on a trade. Hence the name ulcer for the pain and stress these moves can inflict on the less skilled trader.
In this article, we will test the indicator to see how well it can forecast extremes in the market.
How to Calculate the Ulcer Index
The index is all about calculating the level of risk by looking at how far a stock has fallen from recent highs.
The calculation of the ucer index is a three-step process.
Drawdown Percentage = ((Close - Highest Close over 14-periods)/Highest Close over 14-periods)
Squared Average = (14-period Sum of Percentage Drawdown Squared)/14
Ulcer Index = Square Root of Squared Average
What Does the Ulcer Index Tell Us?
The index is a way for you to quickly size-up the level of volatility in a trade at a glance. There are two things that I see slightly differently than the other articles on the internet.
#1 - High Readings = Time to Get Short
There are several blog posts which state that a high reading shows an increased level of risk and should be avoided. I 100% agree with that statement, except why avoid the stock completely?
Why not go with the trend and get short?
For example, it's clear that once you see readings above 40, a stock is in real trouble.
Now, this doesn't mean you should get short right away on a high reading, but rather wait for the stock to rally on light volume and then open a trade.
Since you are short, the high reading means it's actually a low-risk opportunity for you versus if you were long.
#2 - Low Readings Another Short Opportunity
Low Readings Are Short Opportunities
In the above chart, do you see how the low readings present short opportunities?
Again, you can't go out here and just start shorting on every low reading, you will need more confluence from chart patterns and other technical indicators.
Does the Ulcer Index Work Intraday?
The indicator works just as well on an intraday basis as it does on daily and weekly bars.
Below is a chart of the stock ABID. Notice how the indicator tracks the volatility of the stock with the same level of accuracy as the longer timeframe charts mentioned above.
Intraday Price Chart
My Issue with the Indicator
While the indicator will provide an indication of increased price volatility, it is quite delayed.
The reason the above charts appear to nail each top is that there is a 14-day look back period. When you are trading the stocks in real-time it will be very difficult to use the indicator for any forecast purposes.
Too Much Subjectivity
Now don't get me wrong. Any indicator or trading method will require some level of analysis. There simply is no way around it.
However, the ulcer index on one chart can mean an entirely different thing on another. For this reason, I feel the level of mastery required to gain a firm grip on the indicator places too much of a burden when analyzing stocks.
Where the Indicator Works
Where I can see value in the indicator is in simply gauging the volatility of a stock and sizing up broad market behavior.
Using the Ulcer Index as a Volatility Filter
The indicator can do one thing and one thing really well. It can provide you with an excellent volatility indicator.
For me, I do not trade penny stocks or stocks with high volatility.
Why you may ask?
Because honoring my stops is one of my biggest weaknesses. Therefore, trading low volatility stocks prevents me from placing blow up trades.
So, a simple filtering method is to set a maximum amount of the ulcer index that you will trade. For example, if the stock has an ulcer index value of 10 or more you will not place any trades.
Ulcer Index Below 10
This way you are not taking any long positions in a stock that has the potential of causing you real pain.
Assessing The Market
Another way to leverage the indicator is to assess the broad market.
Whether you are a day trader or long-term investor, it's a good idea to have some indication of what the market is up to.
Above is a 5-minute chart of the S&P 500 E-mini.
The point I am illustrating above is that you can also use the ulcer index to gauge the level of risk prior to a breakout.
Please note this does not mean the breakout will work, but it lest you know there is a lower level or risk prior to entering the trade.
If you do not trade futures, it's also just good to know the market is moving higher with lower risk.
Why is the risk lower?
Well as you can see before the breakout, the market was flat before showing a sign of strength. This works in your favor because you can now place a tight stop below the recent congestion.
How Can Tradingsim Help?
Tradingsim has the ulcer index in our library of technical indicators. From what I can see, the indicator requires further analysis for you to build a system.
Rules such as thresholds for filtering and specific rules for going long and short.
Bar Chart - you will need to locate the 52-Week High link on the page
How to Trade Stocks at 52-Week Highs
Now that we have covered how to identify stocks making new highs for the year, let's talk through some basic trading strategies.
#1 - Finding the Right Patterns
Every new 52-week high is not created equal and the last thing you want to do is buy every stock making a high.
The key thing you want to assess is the quality of the pattern going into the breakout.
One of the simplest patterns to recognize is the bull flag pattern. In the below example, you can see how the stock began to develop a flag near the 52-week high, followed by a strong breakout that held the highs of the day.
Bull Flag - 52 Week High
These are the types of patterns that can increase the likelihood of a 52-week breakout holding and going higher.
Rounding Bottom - 52 Week High
Above is another common chart pattern - the rounding bottom.
Essentially the pattern would take over a year to develop, so patience is required. The first one or two breakouts will likely be headfakes as the smart money will use the opportunity to accumulate shares.
Then once the breakout occurs the target is the depth of the rounding bottom formation.
#2 - Stop-Loss Management
As you can imagine 52-week highs are extremely popular and everyone can see them, so they come as no surprise.
For this reason, there will be those that will short the move and those that will buy long.
As a trader no matter how great your edge, things do not always go as planned.
So when do you know things have gone wrong?
A simple stop management technique is to place your stop below the break of the trendline.
Break of Trendline after New 52-Week High
How to Avoid False 52-Week Breakouts
Again, you have to remember that every 52-week breakout will not go according to plan.
One way to avoid an unnecessary headache is to avoid stocks that are making new highs but in the context of a larger bear market.
New 52-Week High in Context of a Bear Market
Notice how the basing pattern ran you right into overhead resistance. Without having this greater context you would have been blindsided about why the bull run higher came to an abrupt end.
What are the Best Indicators for Trading 52-Week Highs?
Stocks making new yearly highs are what I would categorize as momentum plays. This essentially means the stock is moving in a parabolic fashion higher and not just dragging along.
To this point, momentum indicators and trend following indicators are suitable for these strong moves higher.
Stays Above Moving Average
In the above chart of Amazon, the stock not only made a new 52-week high but also an all-time high.
The key point to call out is the stock was able to stay above the moving average as it screamed above $1,000 per share.
How Can Tradingsim Help?
Tradingsim will provide you the ability to trade these 52-week highs on both a daily and intraday basis.
This will allow you to define your own custom trading rules and to utilize the indicators that work best for your trading style.
As a day trader, a common question asked is should you use daily charts?
The root of the question comes down to the fact you are trading intraday, so why care about what's happening on higher timeframes?
In this article, we will explore many aspects of day trading with daily charts to see if it's a good fit for you.
Using Daily Charts Can Simplify Things
Please do not interpret simplify as easy.
What I mean by this is that by going to a higher timeframe, the chart does not give you as many signals. Let's dive into a three trading setups utilizing daily charts to further illustrate this point.
#1- Normal Daily Buying and Selling Opportunities
There are going to be those of you that like to day trade normal buying and selling opportunities. These are trades that setup on the daily bar, but there isn't necessarily anything special about the price action.
It comes down to an opportunity displaying itself on a daily chart and you go along for the ride.
Long and Short Trades
Below are two examples of a short and a long trade based on price action and technical analysis.
The point is that you don't fire and forget after making your trade, but more the daily chart gives you a clue that traders on a higher timeframe are taking a position.
For example, in the below chart where you see a short signal, this doesn't mean you sell short and hold.
What it means is that if you are going to trade the stock, you should take a short position. Conversely, the next trading opportunity is a long after a breakout of the inside bar.
Again, you will still need to do the hard work of looking at the charts on an intraday timeframe.
Day trading on the daily chart time frame
#2 - 52-Week Highs/Lows
Another simple approach for using daily charts is to look for new 52-week highs or lows.
For example, if a stock makes a new 52-week high this is a prime opportunity to get long.
Now swing traders may look at this as an opportunity to buy and hold. As a day trader, you can alternatively look to buy the breakout in the morning and hold through lunch.
This way you can capture the bulk of the move on the breakout day, but not be committed to holding the stock for weeks or months.
#3 - First Big Green/Red Day
In this trading example, you want to identify the first big green or red day.
If it's a big green day, you will want to get long the stock. If it's red you will want to get short.
First Big Green Days
Now, I do not trade high flying stocks because I stick to the lower volatility plays.
However, that doesn't mean these are not great trade opportunities.
In the above chart, you will see the stock produces a number of large green bars. As a day trader, you can then locate these moves and over a one to two week period, continuously day trade the setups as they present themselves.
So Is Day Trading with Daily Charts Worth It?
I do not use daily charts on a consistent basis. The largest timeframe I am currently using is 15 minutes and I zoom way out to see if I am hitting any key levels.
But there are times when I will zoom way out to daily and even weekly charts if it appears a stock is testing a significant level.
For me, it comes down to the fact adding daily charts all of the time gives me information overload.
However, if you plan on watching daily, you will need to watch many other timeframes and this will require you to have multiple monitors.
At the end of the day, trading is all about making a profit and if you can do so with daily charts - stick with it.
How Can Tradingsim Help?
Tradingsim has over 14 different timeframes for you to practice day trading. We also have daily and weekly timeframes for you to zoom out on the action in order to find prime trading opportunities.
A trending stock is one that is increasing or decreasing in value on a defined slope.
Can you see how hard the stock is trending up and to the right?
When you see a trending stock, it should pop out at you like the above chart.
#2 - Structure of a Trending Stock
There are a few key components of a trending stock which will help you identify them quickly on the chart.
Higher Highs and Higher Lows
For stocks trending higher, you want to see a pattern of higher highs and higher lows. This means the stock is able to push to new highs with each new round of buying.
Then on pullbacks where traders are taking profits, the stock does not breach the prior low. An easy way of thinking about this is to imagine you are looking at a staircase on a two-dimensional view and you are watching someone go up the stairs.
You will never have one stair below the prior one. This same logic applies to a trending stock.
Time is a Factor
The other key component often not discussed is time. What I mean by this is that the stock needs to move and move quickly if it is trending.
If traders are actively buying a stock, then they should not be able to stay range-bound for any extended period of time. The key thing here is you want the stock to have some level of momentum.
So, if you look at the stock and it is trending up, but it's a slow process, then you are better off looking for other opportunities.
#3 - How Long Can Stocks Trend?
This is a tough question to answer. If you are going to trade trending stocks, the first thing you need to realize is there are no limits on how high or low a stock can run.
Well, a stock can only run down to zero, but on the upside, there is no limit.
This doesn't mean you hold stocks until the end of time. What it means is that you need to define a system to uncover when a stock is no longer trending and until that rule is triggered should you look to get out of the position.
Otherwise, let the stock do the hard work and do not impede its progress by getting out too early.
#4 - Can you Find Trending Stocks Intraday?
The beautiful thing about the stock market is things happen on major and minor scales.
All of the pieces are moving at times in unison and other times in opposition, in hopes of finding the balance between bulls and bears.
So, it is completely possible to locate stocks that are trending on an intraday basis. Here are a few rules to apply to the filtering process.
The Move Starts in the Morning
The majority of trending stocks will start their move higher in the morning. This is because there is an inflow of volume and excitement on the open from some sort of news event.
This does not mean you can't find stocks that start trending higher in the middle of the day or in the afternoon. But, the morning breakout trades gives you the opportunity to ride the move higher all day.
Intraday Trending Stock
The above chart is of the ticker IRWD. Notice the price expansion in the morning.
You want to see this level of price expansion between 9:30 and 10:30 am.
Again, time is an important element and you need to see things move quickly in your favor.
Midday Slow Down
The next thing you will notice is the stock will begin to roll over around lunch with low volume. This is another buying opportunity to open or add to an existing position.
#5 - What Are the Odds of Finding Trending Stocks?
In my experience markets only trend 20% of the time. Meaning if you are a day trader or swing trader, you can expect the market to have sizeable moves either way 4 or 5 days out of the month on average.
Most of the time the market is more rangebound.
The challenge with finding trending stocks is that many stocks will demonstrate strong trending behaviors. However, as profit takers look to exit their position, stocks will fall back to their original breakout point.
This will lead to you giving back sizeable gains at times.
The part not discussed as much is what this can do to your psyche. Meaning you will start this cycle of seeing your account up, only to later see the gains evaporate.
This process over time can lead you to exit positions too early. Something about the market is that you will somehow exit the ones that will in fact break in your favor while holding on to the ones that don't have a shot.
You Need to Choose
So, I need to close out this section with one simple question. What kind of trader are you? Are you one that wants to ride the big trends all the way and give stocks room to bounce around until your target is hit?
Or do you want to make your profits within the peaks and valleys and not concern yourself with having to find stocks that are trending hard in one direction?
You need to figure this piece out, in order to approach each trade with resolve and with clear boundaries and rules for how you will react to the stock's performance.
#6 - How Do You Find Trending Stocks?
The simple answer is you will need a scanner. The scanner can be as simple or complicated as you want to make it.
We are currently building out a scanner in Tradingsim that will have dozens of filters so you can locate the best trading opportunities within seconds.
Trading Stocks Scanner
If you are swing trading, you may not need something as robust and a simple percentage gainers for the day/week will suffice.
#7 - What Indicators Can You Use to Find Trending Stocks?
There are a host of technical tools that can help you identify and trade trendings stocks. Thus far we have covered price action trading strategies where you can review the highs and lows on the chart.
One of the best indicators for uncovering trending stocks are momentum indicators. These indicators have been designed to uncover major shifts in a market or security in order to forecast a potential move.
So, for trending stocks, you want to find a momentum indicator that has a sharp move higher. You not only want to see the move higher, but you want it to come after an extended period of low volatility.
Expansion Before Stock Starts to Trend
Volatility Indicators (Bollinger Bands)
Not to call out one indicator, but in this case, I think it's valid. Bollinger Bands are an on-chart volatility indicator which use a standard deviation of recent price action to forecast how far a stock can move higher or lower.
This is indicated directly on the chart in the form of bands.
Well, one strategy for identifying stocks that are set to make a strong move is to look for stocks that have consolidated tightly, and then have a sharp move higher.
Let's now take a look at the stock IRWD which we reviewed earlier in this article.
Consolidation Before Trend Starts
How Can Tradingsim Help?
The market is always doing one of three things: going up, going down or moving sideways. It's your job as a trader to figure out which way the market is trending and to trade accordingly.
Tradingsim can provide you the ability to identify stocks that are trending. You can then apply your own custom rules and strategies to identify the most optimal market conditions.
To put it generally, when the market dips, investors, fearful of losing equity purchase SPX PUT options. This results in higher premiums for SPX PUT options, which leads to a spike in the VIX index.
The chart below displays the E-mini S&P 500 futures and the CBOE VIX index. Is there anything that jumps out at you?
Could it be the high readings coinciding with market bottoms?
VIX Index and market bottoms in the S&P500 market
VIX Futures Contract Specifications
Unlike other commodity contracts, there is no physical settlement for the VIX. The final settlement date is 30 days before the third Friday of the following month. Generally, VIX futures contracts expire on Wednesday with the last trading day falling on a Tuesday.
The ticker symbol for the VIX futures is VX, with some brokers using other tickers such as VIX or VI.
Contract and tick size
There is a total of nine serial contract months available at any point.
Each VIX futures contract is 1000 units. In other words, the contract multiplier is 1000 of the respective forward VIX index value.
The minimum tick size is 0.05 VIX points or equivalent to $50.
VIX Futures Contract Summary
VIX Trading Session
The regular session is from 5:00 pm (previous day) to 8:30 AM and 3:30 to 4:00 PM. There is a small break from 3:15 PM to 3:30 PM and from 4:00 PM to 5:00 PM.
The trading week starts on Sunday at 5:00 PM, so if you are holding any positions over the weekend, you will want to check-in before Monday morning.
Therefore there are no long-term bull markets to ride like the S&P 500 index. Lastly, due to the volatile nature of the VIX index, being caught on the wrong side of a trade can cost you dearly.
VIX Futures Range 60 – 10 (10-year chart) Source CBOE
The above chart shows a 10-year price history for the VIX futures. You can see that the index oscillates between 60, reached in late 2008 and bottoms out near 10.
Below are a few trading strategies worth testing with VIX futures.
5 VIX Futures Trading Strategies
#1 - Mean Reversion
Mean reversion states when the price rises sharply, price tends to pull back to the mean.
First, wait for volatility to spike.
Bear in mind that the VIX tends to spike on a daily basis. If these spikes do not coincide with a market low or steep selloff, you should filter out these signals.
Trading VIX futures based on mean reversion
The chart above shows a few instances of trading setups where the spike in the VIX index coincides with a bottom in the S&P500 futures. Using this as a confirmation, traders can then look to go short on the VIX targeting the 10-period EMA as the mean.
#2 - Trading based on the VIX/ES chart
A unique approach to trading the VIX is to use a ratio chart of the VIX and the ES futures contracts. You do this by waiting for the ratio to generate a cross of two moving averages, as shown below.
Trading VIX futures based on the VIX ES ratio
Here you can see that the main ratio chart on the left shows a buy signal on the VIX/ES as the moving average crosses up.
Again, you will need to develop further rules to rule out signals as trading every crossover is a sure way to run up commission costs and trading losses.
#3 - The VIX Index and VIX Futures Divergence
In this trading method, you look for divergences between the CBOE Volatility index, VIX and the VIX futures.
The chart below shows the VIX index on the top and the VIX futures chart on the lower half. The areas marked by the red line connecting the highs shows areas of price divergence.
Following this sort of divergence, the VIX futures will often break one way or the other. Its your job to assess the divergence and take a long or short position accordingly.
VIX index and VIX futures divergence
#4 - VIX Contango and Backwardation
Contango and backwardation are two aspects that govern futures markets regardless of the underlying asset.
Contango in VIX futures is where the price of the current month futures is lower than the price of the far-out VIX futures contracts. This simply denotes the fact that investors expect volatility to rise in the future.
Backwardation in VIX futures is where the front-month contract prices are higher than further out contract month prices. It is widely accepted that backwardation often results in a bearish move with the S&P500 in the near term.
Contango and Backwardation can also be compared between the spot and the current month VIX contracts. When the spot VIX closes higher than the current month VIX contracts, it signals backwardation. This closely ties into the previous method of VIX divergence that is described.
#5 - Analyzing S&P500 Markets
Another simple approach to trading the VIX futures is to analyze the S&P500 market itself or the E-mini S&P500 futures. In this approach, the futures trader can conduct a long term analysis of the S&P500 market and wait for the price to reach a specified/identified support level. When this coincides with a peak in the VIX futures, it can serve as a confirmation to go short on the VIX futures.
VIX and ES Markets analysis
The above chart shows the ES markets on the top and VIX futures below.
How Can Tradingsim Help?
The above methods merely outline some of the ways traders can employ techniques to trade VIX futures.
To explore additional strategies, check out Tradingsim.com. We provide access to a futures replay trading platform that allows you to trade the most liquid futures contracts on the global exchanges.
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Out the gate, if it's not already clear in the title of the article, technical analysis does work.
I am living proof of that fact.
Now, the real question is why are you even asking that question. Well, in this article we are going to first uncover why there is doubt in the financial world and then we will touch on proof that it works.
So Why Even Ask the Question?
Ask the Question
You have to go back to the root of technical analysis to uncover the hesitation from the trading community.
My personal favorite of the early technicians is Richard D. Wyckoff which based his entire methodology on price and volume action. This approach still holds up in today's markets.
While I admire Richard's early works, the broad market and public did not pay much attention to it at all. Technicians were viewed as a joke pushing magic.
It wasn't until the 1980s and really the 1990s until technical analysis became more mainstream knowledge. A lot of this had to do with the improved processing speed of computers and the ability to crunch lots of data and display it in a visual format.
Remember, the technicians of the old days had to do all of this by hand.
At the end of the day, again guys and gals running around with hand made graphs were thought of as pikers.
Well, this stigma still exists in some fashion in today's investment community, hence the question does technical analysis really work?
Proof That Technical Analysis Works
Hedge Fund Industry Continues to Grow
The proof is not in the fact I personally have benefited from technical analysis. Don't take my word for it.
If you need proof, then look no further than the hedge fund industry.
You would need to be living under a rock to have missed how the industry has been growing. According to the pensions and investments company,
So, when I was struggling with the breakouts, did that mean technical analysis was a lost cause? Nope, it just means I did not interpret the market environment correctly.
Is Technical Analysis Accurate?
The accuracy of the analysis is going to come down to the individual trader. I can provide two traders with the same day trading tools, yet one of them may have an accuracy rate multiples of the other trader.
How can this be? How can two traders both have the same information yet one yields better results?
This comes down to sheer skill and experience. It has taken me four years to get to the point where it goes beyond just knowing technical analysis.
You also need to know how to apply the rules to real-time market conditions.
Where is Technical Analysis Prone to Failure?
The one area I have seen technicals struggle is in extremely volatile markets. These are securities like penny stocks that can move 20% or more in a matter of minutes.
Now, you, of course, can still master this market with other analysis tools, but oscillators and other technical indicators have a tough time forecasting future price action based on past performance.
High Volatility Stocks
Other than this, the failure is within us, not the indicators.
For example, traders may rely on a technical indicator or system like Elliott Wave to forecast price targets. Well what happens if the price never reaches the target?
Is the system somehow flawed?
Possibly, but it is more likely that you need to take the generic strategies 10 levels deeper to uncover what works in today's trading environment.
It's never the charts, it's always you the trader.
How We Can Help
Tradingsim will allow you to practice trading 24/7. Why is this important?
I don't care how many books or courses you take on trading - you have to put on trades. The spoils of the game go to those with the most experience.
So, if you treat trading like a hobby and read one or two books on technical analysis, then you are likely to develop an opinion that technical analysis does not work.
However, if you are willing to put in the hard work of refining your strategies, you will come to a more positive conclusion about technical analysis.