Trading Strategy: The Best Time to Buy Excessive Fear

The best time to buy fear is when there’s too much of it.

But who in their right mind can tell when there’s just too much?

Honestly, any one can.

You just have to know what you’re looking for with over-extensions on the Volatility Index (VIX) along with its upper Bollinger Band (2,20) and Williams’ %R.

For example, notice what happens the moment the upper Band is hit or penetrated, and Williams’ %R runs above its 20-line.  Not long after, the VIX pulls back and fear begins to subside, leading to opportunity on the long side of the market.

For example, on March 23, 2018, the upper Band was penetrated, as Williams’ %R jumped above its 20-line.  The moment that happened, fear began to fade, at least temporarily, giving way to a Dow run from 23,509 to a high of 24,622.


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In February 5, 2018, the VIX spiked to a high of 38.8 just above its upper Band.

At the same time, Williams’ %R was above its 20-line.

Shortly after, the Dow Jones would run from a low of 23,923 to 25,800.

Granted, none of us can ever know how long a rally will last following fear, but there’s a good chance you can make money by trading excessive fear.

But what’s the best way to trade fear when every one else is running away?

While keeping a level head and by ignoring the noise of the market, you could always take a long position in any one of the following trades, including:

  • The SPDR Dow Jones Industrial Average ETF (DIA)
  • Power Shares QQQ ETF (QQQ)
  • SPDR S&P 500 ETF (SPY)

Most of the time, when the VIX soars too much too soon, opportunity can be found in on the contrarian side of the market.

Simply long trades such as these, wait for the likely bounce, and take your wins.

Then, when volatility and fear get out of hand again, you wait and repeat.

Or, you could always trade the excessive bullishness on the Street, too by just using Bollinger Bands and Williams’ %R.  About 80% of the time, when the lower Band is hit or penetrated and is confirmed with Williams at or below its 80-line, begin to open short side trades, such as puts on the DIA, QQQ and SPY.

As we’ve seen many times, when there’s far too much calm, it eventually gives way to fear.

Trade accordingly. 

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