Tuesday, January 5, 2010

VIX and daily range fluctuation estimates.

I will begin to post my daily reviews after the close today and show you how I played it. But for now I wanted to talk about something that I hope will be interesting. I have mentioned beforehand I look at the DX and VIX on an intraday basis to help with execution on the ES.

I have noticed a pattern on traditional rotational days that the ES has been moving in 10-12 pts for fluctuations for the most part before beginning a counter trend move, with a typical daily range average of 15 or so points. This pattern fascinated me and I began to see patterns in previous times throughout the last 2 years, I began to wonder why this is so.

After doing some homework I began to see that the VIX has something to do with that. Not only does the VIX provide a great inverted indicator of the market action but it also tells us how the typical average daily fluctuation can play out.

Here is the current formula: You take the current value of the VIX and divide it by the square root of the number of days in the year:

EX. VIX = 19.73 SQ RT 365(no. days in year) = 19.10
so 19.73/19.10 = 1.03%

As long as the VIX stays around these levels we can expect about a 1% typical daily fluctuation on rotational days.

1% on the ES being around 1000-1100 is 10-11 pts!

Try back testing this, its pretty interesting. Again trend days will usually blow this typical fluctuation measurement out of the water, but since rotational days happen over 70% of the time, technically you could use this rule and combine with good money/risk management could win more than you lose.