S&P 500 Index(SPX)

About Analysis of the Volatility.

Many traders ignore analysis of the S&P 500 Index (^SPX) volatility by underestimating its importance. A trader may assume that the technical indicators or S&P 500 trading system that he is using is bad when it only need to be adjusted to the volatility.

The S&P 500 volatility analysis is used to define periods of high and low volatility. As a rule, S&P 500 high volatility is a nature of a down-trend, while during an S&P 500 up-trend we may see S&P 500 low volatility. Furthermore, during high volatility, the price of the S&P 500 tends to change direction more quickly than during trading periods of low volatility.

We recommend that, from time to time, you check the volatility, especially if the trading system starts to generate signals when it's too early to open/close trade or when it's too late to open/close a trade. In such situations, you might consider setting a tighter indicator setting in highly volatile periods and a looser indicator setting in periods of low volatility.

At the same time, S&P 500 volatility analysis could be used to generate S&P 500 trading signals. An increase in volatility during an up-trend may indicate a coming correction (down-trend) and, conversely, a decrease in volatility during a down-trend may indicate a coming reversal and recovery.