What is the Volatility Index (VIX) and why is It Important

If you want to get funded account to be a trader, one important aspect you need to know about is the volatility index (VIX). It is a measure of expected fluctuations in price in the S&P 500 index in the next 30 days. VIX is often called the fear index. The index is created in real time by CBOE, the Chicago Board Options Exchange. Anyone who is serious about joining the funded trader program should learn more about it.

How it Works

Its predictive nature means that it measures expected volatility. The index is not reliant on any historical trends or analysis. Its 30-day period also means it is a measure of volatility in the near term. When you join the funded trader program, it is important to keep this in mind.

It is Not Perfect

If you wish to join the funded trader program, you must know no index is perfect. For instance, in November 2017, the VIX climbed to 22%, revealing a high level of anxiety amongst investors. At the time, the VIX showed there should have been a lot of volatility. However, the S&P 500 continued to climb to some of its highest levels.

As it turned out, the index went against what was happening in the market. As a participant of the funded trader program, you would have needed to carefully analyse a wide array of new sources and find the underlying cause of why the Index is behaving as it is.

At the time, anxiety was caused by fear that tax reforms would not be passed, which led to some heated back and forth exchanges amongst the political class. However, it later turned out this was not going to be the case. While you should follow the index closely, it is important to read what the various top investors are saying. Some major players in the world of finance said they were confident tax reforms would pass and it turns out that they were right. If you wish to get funded account, you need to analyse every angle before you make a move.

Why it Matters

It was established in 1993 and all people who engage in fx prop trading use it as a barometer for investor sentiment. Volatility is implicit is the near-term price of the S&P 500 options. It is quoted in percentage. For those engaged in fx prop trading, it offers a quick glance on what might happen.

Historically when the VIX gets to the highest levels, it is usually an indication of economic turmoil. This was especially true during the 2008 financial crash. As fear drops and the markets begin to recover, the VIX will also drop. Another example of how things got out of hand was during the Russian debt crisis when the VIX shot up. It is worth noting that the VIX gets to its highest when the market hits bottom.

In Summary

When you get a funded trading account, you will be taught that sentiment plays a crucial role. Part of the responsibility of owning a fully funded trading account is to know what might happen. Psychology plays an important role in the forex market and when using a fully funded trading account; you need to have a pulse on what investors feel.