Thursday, January 8, 2009

Experimenting with TICK and VIX.

This is what traders do late at night...experiment with various indicators and instruments in hopes of finding an "edge". A lot of traders use the TICK and VIX as market breadth indicators. So I plotted the TICK, VIX and ES on a 1-min chart and tried to find some patterns. What I observed was that one could take trades based on divergence on the TICK and price, in relation to the trend of the VIX. Now, this isn't some earth shattering observation; quite simple actually, but I wanted throw it up on the blog and get some feedback, so here goes.

The top 3 lines are 3 moving averages (exponential, weighted and triangular) of the $TICK.
VIX is in the middle
ES candle-stick chart at the bottom

Trade #1
At 9:20 central time, ES puts in a double-bottom in the 893-894 area. At the same time a lower high is made on the VIX and the TICK also appears to be bottoming out. Take a long at the close of 9:25 at 895.75, with a 2.50 point stop-loss at 1 tick below prior low of 893.50. Exit the trade when VIX breaks its down trend and/or TICK shows signs of topping out. For this example, I chose an exit at 10:11 AM central, at 901.75 for +6.00 points. In reality, I may have exited sooner at 3 points, but for educational/example purposes, the VIX didn't break the down-trend till 10:11 AM and the 900-901 area would have been a good exit.

Trade #2
Around 10:24 AM, we observe that the VIX has put in a higher low, and the TICK is showing negative divergence so we start to look for shorts. I chose the short entry at 10:26 AM at 900.75 with a 3.25 point stop-loss at 1 tick above prior high of 903.75. Same exit criteria is used; we look for topping action in the VIX and a reversal to the upside in the TICK. Exit is taken at 10:41 AM, at 898.00 for +2.75 points.

I realize these are just two examples, and trading in hindsight is always a piece of cake. But this may be something worth monitoring over the next few days to see if/how it works in real-time.

1 comment:

  1. I experimented with divergences in $TICK and ES last year, it is worth looking into. Like any other pattern in the market there are times when this method produces lots of reliable setups, then they're no where to be found for some period of time. I never tried it including the $VIX.V, I'll have to check it out.

    Thanks for sharing it!


At the minimum, please provide your name or Twitter handle when posting comments. Do not post as Anonymous. Comments that contain links to commercial websites will be marked as spam.