Issue 64: A horrible and deadly danger - Masters in Trading Digest

A horrible and deadly danger

Welcome to Issue 064 of Masters in Trading Digest.

Let’s talk about how to handle stock market volatility.

The VIX index is used to measure volatility in the market. It’s like a scorecard that tells you how crazy the market is behaving.

Today, it trades at 30.  That’s “crazy-level.”

When the VIX trades at 30, traders should consider trading half their normal position size to account for higher expectations of stock market movement.

I heard a great story this week that I am excited to share with you.

New trades are released Monday, look out for a Platinum squeeze.

Enjoy,
Jonathan

ARE YOU OK?

“Without education, we are in a horrible and deadly danger of taking educated people seriously.”  ― G.K. Chesterton

“How’s everyone doing?”  I asked in our Options Discord Wednesday morning.  

“Doing well.  All my live trades have worked out so far,” Faisal replied.

“Played the past two VIX trades more conservatively this time, trading smaller and less stressful sizes using MES. Made about a 3rd of the expected range each time, about $1500.  I’m comfortable with this as the account grows.”

This Video Explains the VIX Trades

Faisal then adds, “I took a ZB and ZF  ‘Pablo Implied Volatility Trades live for the first time, I wanted to test the waters with just one lot.”

The volatility trade referred to includes trading short-term bond futures (intraday) around weekly Implied Volatility Bands.

The chart above shows the “Pablo Implied Volatility trade” Faisal refers to.

This trade hit “legendary” status when Pablo Lucena left his career at Facebook to become a full-time trader and Masters in Trading tools developer.

It’s an inspiring story and I’m appreciative he’s willing to share his journey with us.

Those trades worked out well, about $2k or so from both. Slowly grinding, started with $21k. It’s at $29k right now.

“Thanks for all the guidance.” – Faisal.

Masters in Trading Digest - Issue 64

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WHY I CREATED THE VIX TRADING SYSTEM

I started writing the code we refer to today as the “VIX Tool” – particularly the code for generating the buy signals and the backtester in ToS, while sitting at Jonathan's dinner table during the ‘Shorts in snowing Chicago.’

Mercury (Jonathan’s dog) was sitting by my side as I coded the tool.

I then spent about a month tuning the signal, optimizing for the 100 points within 21 days. Once I was convinced all possible permutations had been explored, the best one was selected for generating the VIX Tool's buy signals. 

Good times.

Coming up with trading systems such as the one employed by the VIX Tool poses a significant challenge – one can only test for known scenarios. This tends to be the downfall of most of these strategies. They are acutely tuned for historical data, however, issues with the strategy only become apparent as new market outcomes occur. 

Since the VIX Tool is so well defined, 100 points within 21 days, the strategy used has been resilient to this issue (to my own surprise – the author of the VIX Tool).

A prime example – is the pandemic selloff and VIX spike in March of 2020. 

We were already using the VIX tool as the pandemic market selloff was unfolding.  It handled this never before seen volatility event and still managed to only produce buy signals that were all winners.

And by the winner of course I mean $100 SPX points within 21 days. 

Right before, and some months after the March 2020 VIX highs (June 8 & June 12, 2020 buy signals). And of course several more times since then. Every single signal has been a winner. 

We are quite proud of the work done at Masters in Trading on the VIX Tool.

It would behoove a trader not to take them when they appear.  This is one of our Edges. Leveling the playing field, one trade at a time. 

Pablo – Masters in Trading Tooling. 

SAVE $900 on the VIX Trading System

FINAL THOUGHTS

WHAT TO EXPECT IN THE NEXT MIT DIGEST

Platinum is looking quite attractive right now. Physical inventory levels are dropping fast today.

Over a decade ago, the automotive industry would use platinum before using palladium as they do now.  With prices continuing to distort, what happens to prices if the market corrects this inefficiency?

Those are trades to search this weekend.

Go ahead and watch this presentation on the VIX.  If I can have you learn one thing, I’d ask you to follow VIX Term Structure to protect against these type of violent market moves.

Keep your feedback coming into support@mastersintrading.com. We’re excited to share your feedback along with fantastic suggestions for upcoming issues.

Until then, trade smart and always manage your tail-risk.

Thanks for reading,
Jonathan Rose

P.S. There’s Not a Trading Signal We Have More Confidence In.  There’s a PDF Included in the VIX Demo so You Can Follow Along with the Back Tested Trade Results.

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