The Volatility Index 75 or VIX has considerable popularity and utility for Forex traders as an indicator of market sentiment to measure implied volatility. Remember, volatility is the amount of movement in which the price deviates from its average price over a while. Specifically, the VIX measures the implied volatility, rather than historical volatility, of an option branch and is sold on the S&P 500 index. If we think of options as a measure of protection against corrective price movements against a major trend, then we understand that the greater the implied volatility, the greater the fear. among trend-following traders that the market reaches an extreme (low or low). peak). Read more about VIX 75 at http://www.volatility75.net/.
Several currencies are sensitive to the equity market and that is the reason why this indicator also serves to build a Forex trading methodology. Like other sentiment indicators, traders view the extremes on the VIX. If the VIX shows a downtrend, this means that traders are buying fewer options, which in turn means that they are satisfied with the underlying price. When the VIX reaches extreme lows, traders are prepared for a reversal in the VIX which implies a higher risk trading environment is coming soon. Pairs such as USD / JPY or EUR / JPY are sensitive to equity prices and thus can find reliable tools in this indicator. The bottom on the VIX can be seen as a reversal from the top extreme in the pair as traders have reached a peak of confidence and optimism for the trend.
A contrarian approach with sentiment indicators cannot exist if the efficient market hypothesis is correct, because price action will continue to be determined by logical fundamentals. A contrarian approach can only be taken because prices are largely determined by market sentiment. Crowd behavior is a mix of many types of biased thinking and therefore nearly impossible to measure. However, several tools are belonging to the category of market sentiment indicators that we will use to determine the bullish sentiment and bearish market sentiment. There are many indicators of sentiment, and the ways to interpret them to vary widely. After all, they should be used with other indicators and even with fundamental analysis as we have explained so far.