You didn’t make a mistake; the market’s underlying logic changed.
* Trading is risky. Your capital is at risk.
Mr Qian’s account has been wiped out again — for the third time in six months…
The money in his account never seemed destined to stay there: one major wave of geopolitical risk came crashing in, and his positions simply couldn’t withstand it.
But Mr Qian has always been persistent, and his refusal to admit defeat prompted him to take a hard look at the mistakes he had made in his trading.
After careful reflection and discussions with the platform’s analysts, Mr Qian came to the conclusion that, apart from common mistakes made by novice traders — such as poor position management and poorly placed stop-loss orders— the timing of his trades was another area he needed to improve.
The analyst pinpointed one of Mr Qian’s biggest problems: his tendency to trade “when he shouldn’t be trading”.
Key takeaways
The VIX is a “price tag” for market fear, not a tool for predicting whether prices will rise or fall.
It reflects the price investors are willing to pay to hedge against risk. A surge in the VIX signals heightened volatility, wider spreads and a greater risk of price gaps, with the likelihood of a margin blow-up rising sharply.
Use VIX to classify risk levels and proactively adjust your positions.
A VIX below 15 indicates a relatively safe zone, 15–25 a risk zone, above 25 a high-risk zone, and above 40 an extreme-risk zone. When the VIX rises above 25, reduce leverage, hold more cash and use strict stop-losses.
Extreme values may signal a potential reversal, so avoid focusing solely on one-directional risk.
A sharp spike in the VIX followed by a pullback often suggests that panic has peaked and a market bottom may be near. Conversely, a prolonged period at very low levels, around 10–12, may encourage complacency and increase the risk of a sudden correction. Monitor the VIX daily to help you decide when to take risks and when to be defensive.
When should you stay out of the market?
Before and after a major unexpected risk event, market volatility can increase dramatically. Unless you are a seasoned professional with a highly developed feel for the markets, it can be extremely difficult to make rational decisions under such conditions.
For the average investor, trading in such an environment is like trying to ride out a massive tsunami in a small dinghy.
How can you spot a tsunami before it hits?
Mr Qian learned that market professionals and experienced traders regularly monitor an indicator known as the “fear gauge”: the VIX.
Its full name is the CBOE Volatility Index (Chicago Board Options Exchange Volatility Index), and it is widely used as a barometer of market sentiment and systemic risk.
The VIX reflects the cost investors are willing to pay to hedge against risk. When the market expects greater uncertainty, the VIX tends to rise accordingly.
How is the VIX calculated?
Unlike an asset’s underlying price or traditional technical indicators, the VIX measures the market’s collective expectations of volatility over the next 30 days based directly on the implied volatility of S&P 500 index options.
What does this mean? Implied volatility reflects the market’s expected price fluctuations in the underlying asset, based on option prices. For example, an implied volatility of 30% means the market is pricing in annualised volatility of around 30%.
The VIX is calculated on the basis of this measure. It is independent to the asset’s historical price movements and reflects the weighted average of pricing information across the options market, standardised over a fixed period (the coming 30 days).
In other words, the VIX does not move simply in response to buying and selling pressure in the underlying market. This helps preserve its objectivity and makes it more resistant to manipulation.
How does the VIX represent the market's level of fear?
This feature of the VIX’s construction allows it to capture the “sentiment premium” that market participants are willing to pay to hedge against risk.
Here is a simple example: when investors expect the market to fall sharply, they buy large quantities of S&P 500 index put options, pushing option prices higher. This “price increase” forms the basis for calculating implied volatility and, in turn, the VIX.
A rise in the VIX essentially reflects market participants’ willingness to pay more to protect their portfolios.
Key insight: remember that the VIX does not predict “whether” an asset will fall; rather, it shows “how concerned” market participants are about the risk of a decline. It is a price tag on market sentiment, not a price forecast or a technical indicator.
Surging VIX: An Exponential Rise in Liquidation Risk
As the VIX reflects the market’s expectations for stock market volatility over the next 30 days, an abnormal spike in the index is a clear sign of elevated stress in the US equity market, led by the S&P 500. Through cross-market spillovers, this can quite naturally push your account into a “high-risk” state.
During his review, Mr Qian discovered that every time his account had been “wiped out”, the same pattern had emerged:
VIX spikes → market volatility surges → asset prices plunge → margin becomes insufficient → forced liquidation (stop out)
Specifically, higher market volatility can increase the risk of liquidation through roughly the following chain of events:
A. A high VIX signals greater market volatility, with sharp price swings becoming more common and highly leveraged positions more likely to hit their stop-loss levels.
B. When the VIX is high, bid-ask spreads on an account’s holdings are also more likely to widen suddenly, even if only briefly. Even if a stop-loss has been set, the order may fail to execute at the intended price due to a lack of liquidity, resulting in significant slippage.
C. If a major risk event occurs outside trading hours, the market may reopen with a substantial overnight price gap. Without a sufficient capital buffer, the risk of forced liquidation can increase significantly.
D. To discourage traders from trading low-liquidity instruments, some brokers and trading platforms may temporarily increase margin requirements, potentially triggering a margin call on an account that would otherwise have remained within safe limits.
Let’s take a look at the market conditions surrounding several historical peaks in the VIX:
| Historical Event | VIX Peak | Sentiment Transmission Mechanism | Market Performance |
| 2008 Financial Crisis | 89.53 | Bank failures triggered a liquidity panic, prompting institutions to rush to buy put options as a hedge | The S&P 500 plunged 20% in a single month |
| March 2020 COVID-19 Pandemic | 82.69 | Amid a global sell-off across asset classes, the VIX became a key quantitative gauge of safe-haven demand. | Circuit breakers were triggered four times in US equities in a single week |
| April 2025 Surge in Fed Rate-Hike Expectations | 30.02 | The market repriced interest-rate-sensitive assets, with the VIX signalling heightened policy uncertainty. | The S&P 500 fell 4.2% in a single day, its largest one-day decline for the year. |
Make the most of this key risk indicator
The VIX was launched in 1993, with historical data extending back to 1990. Over the years, market professionals have developed a well-established approach to using the index.
Here is the widely accepted framework for assessing market risk based on VIX readings:
VIX < 15 (reasonable-risk zone): market sentiment is stable, and investors are relatively optimistic about the outlook.
15 ≤ VIX ≤ 25 (risk zone): volatility begins to rise, and market unease starts to spread.
VIX > 25 (high-risk zone): market anxiety intensifies, and irrational investor behaviour becomes more pronounced.
VIX > 40 (extreme-risk zone): the market is typically experiencing a sharp sell-off or extreme conditions such as a major geopolitical or economic crisis.
As the VIX rises, market risk increases, and traders should progressively scale back their trading activity.
A survival guide for margin accounts in extreme market conditions:
Proactively reduce leverage:
When the VIX rises above 25, proactively reduce the size and frequency of your trades; you may also ask the platform to lower your leverage. Avoid taking fully leveraged positions.
Increase your cash reserves:
Use only a portion of your funds for trading, keeping sufficient available funds in the account as a safety buffer against sudden increases in maintenance margin requirements.
Use hard stop-losses:
Rather than relying on subjective judgement, set conditional orders in advance so you can lock in gains or exit at your stop-loss before liquidity dries up.
Using the VIX like the RSI
A lower VIX does not necessarily mean the market is safer; likewise, a surge in the VIX often reflects an extreme release of bearish sentiment. As a result, when the indicator reaches unusually high or low levels, the VIX’s “overbought” or “oversold” state can offer useful clues about potential market turning points.
Extreme highs may signal a market bottom:
When the market plunges and the VIX spikes sharply over a short period — for example, above 35–40 — before beginning to fall, this often suggests that panic has peaked.
Extreme lows may signal growing risk:
When the market repeatedly reaches new highs while the VIX remains at historically low levels — for example, around 10–12 — for an extended period, this may indicate excessive complacency or “irrational exuberance”. In such conditions, traders should be alert to the risk of profit-taking triggered by sudden negative news.
Conclusion
The VIX is not a forecasting tool but rather a “price tag” on market sentiment. It is more than just a number: it reflects the level of fear investors are pricing into the options market with real money.
When the VIX surges from 15 to 40, it does not necessarily mean the market itself has “turned bad”; rather, it means investors are becoming increasingly fearful.
Armed with this gauge of market sentiment, Mr Qian now has an additional tool to help filter out excessive market risk. He has also developed a routine of daily checks and monthly reviews:
Checking the VIX at the start of each trading day and using it to calibrate his risk appetite for the session;
Regularly reviewing the correlation between the VIX and his account’s profit and loss at the end of each month, helping him refine his own “sentiment-to-action” framework.
This time, Mr Qian can set sail once again with greater confidence in his trading journey.