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Strategies & Market Trends : ajtj's Post-Lobotomy Market Charts and Thoughts -- Ignore unavailable to you. Want to Upgrade?

To: Sun Tzu who wrote (48720)	1/16/2022 9:55:19 PM
From: Sun Tzu	1 Recommendation Recommended By ajtj99 Respond to of 96879

A little bit more on the subject of developing indicators, and this particular indicator. Let's start with the fact that an indicator should actually mean something. By this I mean that it should have a valid theoretical foundation. It is easy to throw in a bunch of random metrics and find a correlated pattern within them. For example, and I kid you not, I knew of someone who had developed a complex system based on the location of the planets in the solar system and the Elliott Wave. That is an example of a bad indicator even though it worked for a while. It was just a fluke. In theory, VVIX should tell you how quickly the sentiment can change. The ratio of VVIX to VIX then tells you how sticky the current trend in VIX is. In the case of the chart depicted, it is saying that the uptrend in VIX has some legs to it. And this is why it is correlated with big market drops. Now a few words of caution: Plain ratio indicators like this can never be interpreted in isolation. To begin with, the absolute values matter. But the ratio removes that information. Secondly, your primary indicator should always be the price. You should never act based on such indicators without a confirmation from the price. Thirdly, VIX is based on a 3rd derivative of the price and VVIX is the VIX of VIX, so it is really removed from the price. You cannot use them without backtesting and without adding in some compensating terms to the formula. Keep all of these in mind before choosing to act on the indicator. He is on to something. But I wonder if he has the full picture.