Choosing the Right Index

Brandon Wendell
Instructor, CMT

Back in July 2013, I wrote an article called, “Watching the Markets,” that dealt with identifying the leading and lagging indexes for stocks. This tool is useful for finding the right security to trade for the market conditions. While teaching a class this week in Online Trading Academy’s Kansas City office, this tool benefited the class during a trading session.

By comparing the ETF’s that track the broad market indexes, I was able to see which one was the strongest in the dominant uptrend for the day and which one was lagging.

percent etf

The QQQ was stronger than the other ETF’s. The DIA was the weakest. That meant that when we were looking to trade long, we would likely make the most profits by buying the QQQ. For a short opportunity, the DIA was more likely as a weak ETF to offer a high probability, low risk short trade.

As the markets moved higher throughout the day, the leading index, QQQ, quickly approached a supply zone from a larger time frame. Since the strongest ETF was about to turn from supply, a trader could have taken advantage of shorting the weakest ETF.

qqq30 supply

This is where many traders make mistakes. They try to short a strong stock or ETF rather than look for a weak one that should offer a higher probability of success with lower risk. Look at what would have happened to a trader that shorted the QQQ in a smaller time frame at a weak supply.

qqq no short

Instead, an educated trader who shorted the weak DIA at supply when the leader (QQQ), gave up would have made a nice intraday profit.

dia short

Choose the right security to give yourself the best chance for success in trading.  This is part of your risk management.  You must realize that risk management is much more than simply placing stops.  Come find out how to protect your capital while finding consistently profitable opportunities in the markets.  Join Online Trading Academy today.

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.