SignalFrogVolatility measures how much prices move — not in which direction. A market rising steadily for weeks has low volatility. One moving three percent a day in alternating directions has high volatility. Neither says anything yet about whether you lose money.
What the VIX measures
The VIX derives from the prices of options on the S&P 500 how much movement the market is pricing in for the next thirty days. It is therefore not a measurement of the past but an expectation — one that market participants back with their own money.
The popular name "fear index" is misleading. The VIX measures expected movement, not fear. The two usually coincide because large moves have historically been downward more often than upward.
Why low readings deceive
The most important and hardest point to accept: a low VIX does not mean there is little risk in the system. It means little risk is expected.
Before several of the largest declines of recent decades the VIX sat in the lower part of its range. Calm is the precondition for positions to build up that then have to be unwound simultaneously at the first disturbance.
How to place it
What helps is less the absolute level than the change. A jump from twelve to twenty says more than a reading holding at eighteen. And it says most when it occurs alongside other measures — rising credit spreads, for instance. A single indicator moving is noise; three moving together are a signal.