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Contrarian thinking is not just about trying to be otherwise

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Not applicable
people often get the concept of contrarian thinking wrong. Some misguidedly think its just about thinking differently to anyone and some adopt it as a disposition in the hope that it makes them seem smarter than the rest. Contrarian thinking does contain elements of unigeness and seperation from the crowd but its not just that. Contrarian thinking needs to operate at the level of market dynamics. Take the simple concept of the VIX . a volatility indicator...often refferred to as a fear indicator. It simply is a measure of how many people think the market is going higher versus how many people think the market is going lower. The Vix dropped to below 18 yesterday ...this relatively low reading indicates very few people think the market is going lower. The contrarian looks at this and his interpretation is ..."there is very little protectiopn to the downside"...his rationale being that if the market starts to move down there are very few shorts to take profit and therefore the market can fall for an extended period...only when buyers see value again.
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17 REPLIES 17
Franksays
Frequent Contributor
Or you could use the vix to determine the probability of gaps forming? The lower the VIX the lower the prob.
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Not applicable
yes sure its also usually correleated with low volatility which is correlated in turn with less gaps and certainly smaller gaps
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Rams
Super Contributor
thats all hogwash from a very desperate salesman and you thinking when trading...you broke another rule
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Not applicable
thanks Rams...once again you have edified us all. I think about other things so i dont need to think about the trade.
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Rams
Super Contributor
yeah think about how you lied to the forum. if i were you(God forbid), i would be gone by now
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Not applicable
i suggest that as an OST employee you should have no contact with customers untill you go on some kind of course as you are digging a deep hole for yourself
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SimonPB
Valued Contributor
vix is not about direction, or if people think the market is going higher or lower .. it is about how much the annualised return is expected to move in the next 30 days .. it says nothing about direction ..
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Not applicable
Simon you bare quite right. No one said anything about it saying anything about direction. This post was to get some discussion going around contrarian thinking. If however you look at some of the correlations between stock major stock market sell off and the Vix you will find there is a correlation with a low VIX. It cannot be used as a predictor of direction but it can indicate times when traders need to be more aware that a sell off can occur or even in the case of a very high VIX the market could be bottoming. I can help feeling this is onnce again argument for the sake of arguing especially as you seem to have misunderstood the whole point of this thread. Maybe you could add something useful?
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Not applicable
Simon you are wrong when you say the VIX is not about whether people think the market is going higher or lower. It is a put call ratio and in essence it measures the protection traders are buying against any downside. The greater the perceived chance that the market may surprise to the downside the more pust they buy.
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SimonPB
Valued Contributor
your comment "The Vix dropped to below 18 yesterday ...this relatively low reading indicates very few people think the market is going lower" is what struck me as very wrong .. and it is way more than a call put ratio, way more ..
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SimonPB
Valued Contributor
an no, tis not an arguement for the sake of arguing .. I think you are wrong ..
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Not applicable
yes well I still dint say anything about direction...in the previous post I once again confirm what i said... IT IS about the direction people think THINK the market is going in. The whole point is that the market often goes in the opposite direction. Argument for argument sake. But please illucidate us on the put call ratio...im sure there is a whole lot more but that basically is what it is a measure of.
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Not applicable
The price of call options and put options can be used to calculate implied volatility, because volatility is one of the factors used to calculate the value of these options. Higher (or lower) volatility of the underlying security makes an option more (or less) valuable, because there is a greater (or smaller) probability that the option will expire in the money (i.e., with a market value above zero). Thus, a higher option price implies greater volatility, other things being equal.
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Not applicable
I'm not one to use the VIX as an indicator so I have no expertise on the subject but is it not just a collection of mass thoughts i.e as the markets keep going higher the possibility of a sudden drop, correction ect becomes a major possibility and visa versa but not certainty. So the massive stock market rally during the 2000's till the drop the VIX was low then only became higher afterwards. Would that not constitute trying to make a chart from noise? Just my thoughts...
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Rams
Super Contributor
I dont use VIX or any other medication but ALSI is breaking another golden trading rule: he takes a position, then looks for ten other indicators or chart patterns etc to rationalise his position. Trading must be simple like taking VIAGRA...if you want to stay short, just dont take it!
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SimonPB
Valued Contributor
you have read this, yes ??
http://www.cboe.com/micro/vix/vixwhite.pdf
if you want a call/put ratio why not just use that ??
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Not applicable
I repeat.....The price of call options and put options can be used to calculate implied volatility (which is what the VIX is a measure of), because volatility is one of the factors used to calculate the value of these options. Higher (or lower) volatility of the underlying security makes an option more (or less) valuable, because there is a greater (or smaller) probability that the option will expire in the money (i.e., with a market value above zero). Thus, a higher option price implies greater volatility, other things being equal......... This discussion was not really about the suitability of the VIX as a trading tool but as an example of what contrarian could constitute contrarian thinking. There are hundreds of ratios one can use to determine market profile but this is not what that was about.
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