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Trading The Market

Updated on November 30, 2011
Daily chart
Daily chart | Source
Daily chart
Daily chart | Source
Daily chart
Daily chart | Source

Trading The Market

Trading the market” is the goal of all professional traders.
There are different types of traders.  Traders who trade currencies or commodities, traders who trade futures, stocks and indices.  Despite these differences, the market always leads. Traders always trade first the market before trading individual financial instrument.  The purpose of this article is to discuss:  what is the market and what is the importance of trading the market.

What is the market?

The world’s biggest economy is United States Of America but S&P 500 is the market.
S&P 500 represents five hundreds large capital common stocks actively traded in the USA.
It is the benchmark of the overall market and is considered as the market.
When the S&P 500 is down, the market is down and when it is up, the market is up too.
The market leads.  It leads every other market, every sector, every financial instrument and every major indices ( FTSE 100, CAC40, DAX30, NASDAQ 100).  Most indices are positively correlated to the S&P 500 except the Nikkei 225.  However due to globalization, in recent years, Nikkei 225 has been mimicking the S&P500.  No markets have escaped the S&P 500. Consequently, “trading the market” has become a serious matter to all investor and traders.

The importance of the market.

A stable data is a truth or a constant or something that remains intact during chaotic changes. One of the market stable datum is:  Market controls sectors, market leaders and individual stock. If you consider NASDAQ 100 as a sector, its leaders are Apple and Google. The market will control NASDAQ 100, its leaders ( Google and Apple) and each stock listed on NASDAQ 100. “Trading the market” means: trading first S&P 500, then NASDAQ 100 and paying attention to the direction of the market’s leaders.  The market controls the sector, the sector controls the leaders, and the leaders control each individual financial instrument. “Trading the market” is about harmonious trading.  It is knowing exactly when to sell and when to buy.  As the market is going down, harmonious traders will be busy looking for candidates to sell, and when the market is going up, they will focus on financial instruments to buy.  On the other hand, when the market is consolidating, smart traders will select financial instrument that are mimicking the market.  “Trading the market” is simply about “flowing” with the market. Bullish high probability trade set ups are excellent bullish trade set ups when the market, the sector, the leaders and the individual financial instrument are all in an up trend.  On the other hand, bearish high probability trade set ups are excellent bearish trade set ups when the market, the sector, the leaders and the individual financial instrument are all in a down trend.  To achieve consistent winning trades, it is necessary to first trade the market.

Dow 30 and trading the market

When trading an individual financial instrument that belongs to a sector or to an index, it is important to consider its leaders.  For Dow 30, the two leaders are: Exxon Mobil and Caterpillar.  Best bullish set ups when trading Alcoa .
1/ S&P500 is trending up but not too close to a major resistance zone or it is trending up during early stages of the third Elliott wave.
2/ Dow Jones is also trending up but not too close to a resistance zone or it is trending up during the early stages of the third Elliott wave.
3/ Both Caterpillar and Exxon Mobil are trending up but outside a resistance zone or at early stages of the third Elliott wave in an up trend
4/ A bullish set up appears on Alcoa chart and Alcoa is fundamentally sound business with no warnings or losses.
For bearish financial instruments to sell, we will sell if the S&P500 is bearish but outside a support zone, and both Dow 30 and its market leaders are in harmony with the S&P 500.
Trading the market” is about trading financial instruments in the direction of the market, the sector and its leaders.

Forex and trading the market.

The leader in the forex is the EURUSD.  All positively correlated currencies to the EURUSD
( EURGBP, AUDUSD, NZDUSD) should be traded in harmony with the EURUSD.
On the other hand, currencies negatively correlated to the EURUSD, (USDCHF, USDCAD) must be traded in the opposite direction to the EURUSD.  Please note that, very often the EURUSD  moves in the same direction like the S&P 500 and all major indices.  There are times when they diverge but very often there they will rise, consolidate and fall in unison.

Market indicators and trading the market.

Market indicators are Gold, Crude Oil and EURUSD. Traders focus on these instruments
to understand the general market and the S&P500.  Market’s indicators allow traders to
forecast the market and to make smart trading decisions. It is possible that a trader may substitute the market (S&P500) to a market indicator when trading the market. In this case, the market indicator is used as a leading indicator but one must always wait for the confirmation or for the validation of the signal.

Trading the market” is not an exact science but a common sense trading.  Look for bullish financial instruments when the market, the sector, and its leaders are trending up and look for excellent bearish financial instruments at times when the market, the sector and its leaders are going down.  The market does not always trend, therefore, give priority to financial instruments that are consolidating.
Trading the market“ is about trading the S&P 500, the sector and its leaders.  It involves technical analysis but also fundamental analysis.

This article is written by Georgetrio


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