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You are here: Home / Recent / How to Use Volatility to Your Advantage

How to Use Volatility to Your Advantage

January 21, 1999 by Larry Connors

Tonight, I will begin a series of articles on how to use volatility to your
trading advantage.

The most important feature to understanding how to use volatility is that it
is mean-reverting. This means that periods of high volatility are followed by
periods of normal to low volatility and vice-versa. The academic world proved
this more than 40 years ago.

The second essential feature to understanding volatility is that it is auto-
correlated. This means if market volatility drops today, there is a higher
than average chance it will drop tomorrow.

I have found that the single best place to exploit these inherent market
conditions is with the CBOE OEX Volatility Index, known to traders as the VIX.
The VIX measures the implied volatility of the at-the-money options in the
OEX. When traders are complacent and markets are rising, the VIX tends to be
low. When traders are panicked, especially during sharp market declines, the
VIX reaches extreme high levels. The key to all this information is knowing
how to measure what exactly is a “high” level and what exactly is a “low
level”. Then by combining the above inherent market features with these high
and low levels, you can better gauge when markets have made short-term highs
and lows and are likely to reverse.

In Tuesday’s commentary I will show you how to do that.

Markets to watch

Continue to keep your eye on both the real estate index (and their underlying stocks) and the retail stocks. Both are trading at extremely low volatility compared to normal and are poised for large moves.

Filed Under: Recent, Trading Lessons

About Larry Connors

Larry Connors has over 30 years in the financial markets industry. His opinions have been featured at the Wall Street Journal, Bloomberg, Dow Jones, & many others. For over 15 years, Larry Connors and now Connors Research has provided the highest-quality, data-driven research on trading for individual investors, hedge funds, proprietary trading firms, and bank trading desks around the world.

Larry has been published extensively, with titles like How Markets Really Work, Short Term Trading Strategies That Work, High Probability ETF Trading, and The Connors Research Trading Strategy Series including our latest Guidebook High Probability Trading with Multiple Up & Down Days.

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We’re excited to announce the release of a new investment book written by Larry Connors and Chris Cain, CMT. The book, “The Alpha Formula; High Powered Strategies to Beat The Market With Less Risk “ combines… Hedge fund legend Ray Dalio’s brilliant insight into combining uncorrelated strategies… With new, minimally correlated, quantified, systematic strategies to trade… [Read More]

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Connors Research Traders Journal (Volume 57): 7 Real-World Reasons Why Short Strategies Should Be Included In Your Portfolio

In our new book, The Alpha Formula – High Powered Strategies to Beat the Market with Less Risk, we show the benefits of including short-strategies in your portfolio. As a reminder, building portfolios should be based on First Principles – otherwise known as truths. These truths are: Markets Go Up Market Go Down Markets Go… [Read More]

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